Ravikiran Ceramic Pvt. Ltd., Anand V. DCIT, Central Circle-1, Baroda

ITA 397/AHD/2018

AI Insights

The case involves two appeals by Ravikiran Ceramic Pvt. Ltd. and Mangalya Ceramics against the disallowance of commission expenses by the Deputy Commissioner of Income Tax, Central Circle-1, Baroda. The commission expenses were disallowed on the grounds that the assessees failed to provide adequate documentary evidence proving that the commission agents had rendered any services. The Tribunal examined the agreements and correspondence between the assessees and the agents but found no substantial evidence of services rendered. The Tribunal also considered the principle of consistency and previous assessments but concluded that the current year’s detailed scrutiny revealed facts that were not considered in previous years.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 114206 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 13-12-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 18-02-2018
• Other Referred Cases: Mobile Communication India Pvt. Ltd. vs. DCIT Circle-5(1), New Delhi, Swastik Textile Company Pvt. Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Maximum Marginal Rate; Rule of consistency; Initiation of penalty proceedings; TDS
• Section: 234B; 37(1); 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Siddhartha Nautiyal, Judicial Member Mangalya Cera mi cs, Station Road, At & Post Kanjari , Yal. Nadi ad Dist. Kheda PAN No: AANF M 7555K Ravikiran Cera mi cs Pvt. Ltd. 32, Yogi Park Society, Near Grid Crossing, Anand-388001 PAN No. AABCR 3750J (Appellant) Vs The DCIT, Central Circle-1, Baroda (Respondent) Appellant by : Shri S.N.Sop ar kar, Sr . Adv. & Sh ri Parin Sh ah, C.A. Responden t by : Shri V.K. Singh , S r. D.R. Date of hea ring : 14-12-2022 Date of pronounce ment : 13-03-2023 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:- The present appeals have been filed by two different assesseees who, it was common ground, belonged to the same group, and the issue in both being solitary and identical , relating to commission expenses disallowed in the backdrop of identical set of facts . The appeals by both the assesses have been filed against ITA No. 396 & 397/Ahd/2018 Assessment Year 2013-14 I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 2 separate orders passed by the Commissioner of Income Tax (Appeals)-12, Ahmedabad, (in short referred to as CIT(A)), both dated 18-12-2017, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2013-14. 2. In the case of Mangalya Ceramic in ITA No. 396/Ahd/2018, the disallowance of commission expenses related to that paid to: M/s. Sonali Traders amounting to Rs. 39,21,215/- 3. While in the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018 the commission disallowed related to the following: (a)Shri Jyoti Electric Trading Company Rs. 48,23,618/-. (b)Parul Traders Rs. 17,50,952/- (c)Falguni Traders Rs. 20,29,229/- Total Rs. 86.03 Lakhs 4. A perusal of the order of the authorities below reveals that the claim of commission expenses was denied for non-justification of the expenses so incurred by the assessee in the absence of any documentary evidences filed by the assessee proving that any services had been provided by the specified persons. The A.O. had noted in both the cases that the commission was paid to closely related persons as specified u/s. 40A(2)(b) of the Act and the assessee had not furnished any evidence to prove any services provided by these persons to justify the claim of commission expenses. Accordingly the claim was denied by the A.O. in the case of both the assessees and upheld by the Ld. CIT(A). 5. Identical grounds have been raised in the case of both the assessees and for the sake of convenience, we are reproducing the grounds raised in the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018: 1. Ld. CIT (A) erred in law and on facts in confirming disallowance commission expenses of Rs. 86,03,799/- by invoking provision of section 40A(2)(b) of the Income Tax Act without considering true substance of the transactions. Ld. CIT (A) ought to have considered the factual submission of the appellant and ought to have deleted the disallowance. It be so held now. 2. Ld. CIT (A) ought to have considered fact that there are no marketing expenses incurred by the appellant as commission agent appointed for marketing and other allied activities and ought to have deleted the disallowances. It be so held now. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 3 3. Without prejudice to above and in alternative, It is submitted that payee to whom commission have been paid also paying tax at maximum marginal rate. Hence, there is no loss to the revenue. It be so held now. 4. On the facts & circumstances, Id. CIT (A) ought to have considered submission of the appellant and ought to have deleted disallowance made by AO. 5. Levy of interest u /s 234A, 234B & 234C of the Act is unjustified. 6. Initiation of penalty proceedings u/s 271(l)(c) of the Act is unjustified. 6. The argument of the ld. Counsel for the assessee before us for the allowability of the claim of commission expenses in both the cases was common, and can be summarized briefly as under: (i) it is to be allowed on the principle of consistency since the said commission expenses were being paid since the past many years and had never been disallowed in either preceding or succeeding years. The number of years since the commission was being claimed vis-à- vis the different parties is as under: In the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018: (a)Shri Jyoti Electric Trading Company since 1976 (b)Parul Traders 25 years (c) Falguni Traders 10 years In the case of Mangalya Ceramics Pvt. Ltd. in ITA No. 396/Ahd/2018: (a) Sonali Traders More than 6 years. It was contended that having never been disallowed in the past or in succeeding years, it was an accepted position and could not be disturbed in the impugned year. In support, reliance was placed on the decision in the case of following case laws of Mobile Communication India Pvt. Ltd. vs. DCIT Circle-5(1), New Delhi reported in (2010) 125 ITD 309 (Delhi) (ii) that sufficient evidences were filed by the assessee which have not been disputed by the revenue nor any rebuttal evidences filed by the revenue nor the commission agents examined by the Revenue. The evidences filed by the assessee therefore could not be simply brushed aside. The burden of proof rested on the Revenue, the assessee having sufficiently discharged I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 4 the same. In this regard, reliance was placed on the decision of Jurisdictional High Court in the case Swastik Textile Company Pvt. Ltd. vs. CIT reported in (1984) 150 ITR 155 (Guj.) (iii) the agents having returned the commission income to taxes the entire exercise of disallowance was revenue neutral. 7. The ld. D.Rs. entire thrust however was on the contention that no evidence of rendering any service by the agents was filed by the assessee. That further in the case of M/s Mangalya Ceramic, the agent, i.e Sonali Traders as per the agreement had no work at all to do, since it was assigned a job work which already stood allotted to the assesse and the agent had nothing to do with the allotment of the job work. It was also contended that the item being sold in the case of Mangalya Ceramic was a customized item and could not be sold through agents in the open market who was acting as distributors. 8. We have heard both the parties, gone through the orders of the authorities below and also the case laws referred to before us. Since the denial of claim of commission expenses in both the cases before us is for the reason that no evidences of rendering of any services by the so called agents was furnished by the assessee, which the assessee has vehemently denied ,this aspect being very material to the allowability of the claim of expenses, we shall first be considering the same. 9. Before proceeding we may state that the facts which have not been disputed are that the agents are closely related to the assessees falling within the definition of specified persons u/s. 40A(2)(b) of the Act and are all distributors of the assessee. The evidences which the assessees have filed to demonstrate the genuineness of the claim are as under: (a) the distributorship agreement entered into with each party. (b) copies of correspondence between the assessee and the agents/distributors and also between the customers and the distributors. (c) the return of income, computation of income, balance sheet and profit and loss account of the distributors. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 5 (d) Proof of payment of service tax by the distributors and proof of deposit of TDS by the assessee company on the payments made to the distributors. 10. We shall be going through the contents of these evidences to determine their relevance in establishing the factum of services rendered by the distributors to the assessee for the allowability of claim of commission. 11. The contents of the distributors agreement entered into in the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018 with two distributors i.e Jyoti Electric Trading Company and Falguni Traders placed before us at P.B reveals it is a distributorship agreement allotting different areas to each of them for selling the products of the assessee company. In the case of Jyoti, being Maharashtra, and in the case of Falguni, being Karnataka and Delhi. 12. The scope of work of distributors has been identically worded in both the agreements. The contents of the agreement in the case of Falguni Trades is being reproduced hereunder for convenience : 3. The distributors shall: a) maintain an efficient sale organization and / or office at such place or places as may be mutually agreed upon by the parties hereto. b) Canvass for secure orders and push the sale of the products manufactured by the manufacturers to the best of their ability with the territories of mutual understanding by both parties and finally decided by principal, (c) Procure orders from customers and pass on the same to the. manufacturers from time to time for extrusion and the distributors shall sell the same at the rates and on such terms and conditions which may be notified to them from time to time by the manufacturers; d) Bear the cost in connection with the establishment and maintenance of the showrooms and ware-houses, if any : e) Guarantee-to the manufacturers the performance of all contracts in respect of orders procured by them and shall also render such services to the manufacturers for the recovery of the amount due from the customers as may be necessary. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 6 f) Devote their time and attention to the development of the said business and to use their best endeavours to improve and extend the business of the manufactures and to act diligently and faithful. g) Be true and faithful in all their dealing and will use their best endevaours to advance mutual interest and to promote and increase sales of the product of the manufacturers. h) Authorized to act for and on behalf of the manufacturers in the matter of the business in accordance with instruction from time to time from the manufacturers. i) Entitle to appoint sub distributors and / or dealers for the purpose of effectively dealing with the manufacturers products on such terms and conditions as they may deem fit but the responsibility liabilities arising there from shall be of the distributors only. j) Agree that during the continuance of this agreement distributors shall not directly or indirectly engage themselves, or be otherwise interested in the sale or manufacture of any similar products of any other manufacturers or traders. k) Not assign the benefits of this agreement to any other person, without express consent in writing previously obtained from the manufacturers. And l) Not any time either or after the termination of this agreement divulge Or make known any secret, amount or dealing in regard to the manufacture of the products of the manufacturers and / or the business of the manufacturers which may have come to the knowledge of the distributors. 13. The entitlement to commission is spelled out in para no. 5 of the agreement as under: 5. The distributors shall be entitled to a commission by way their remuneration for their services calculated to 4% (Four percent) on all sales made by the manufactures in the mutually agree as the distributors. The said remuneration will be exclusive of any trade discount or rebates or allowance or compensation or sales - tax or central excise tax or octroi which may be allowed by the manufactures to all or any of the customers in respect of any contracts whether made directly by them and / or through their distributors, Para no. 6 states that the accounts between the manufacturer and the distributor is to be made up and adjusted every three month as under: 6. The accounts between the manufacturers and distributors shall be made up and adjusted every 3 months. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 7 14. In the case of Parul Traders the agreement is for production cum marketing job work, requiring Parul Traders to carry out the entire job work of various ceramics items for Sud Chemie India Pvt. Ltd. on behalf of the assessee and to procure further orders from Sud Chemie. The contents of the agreement placed before us at paper book page no. 47(a) are as under: AGREEMENT FOR PRODUCTION CUM MARKETING THE PRODUCT Whereas Ravikiran Ceramics Pvt Ltd., AT. Anand, a Private Limited Company of the one part has obtained order to carry out job work of various ceramic items from Sud Chemie India Pvt. Ltd. at Nandesari. And whereas, M/s. Parul Traders, at Anand, a partnership firm party of the second part having qualified and experienced partner to manufacture and market the ceramic items as well as job work ceramic items as per requirement of Sud Chemie India Pvt. Ltd. interested and desired to carryout manufacture as well as job work on behalf of Ravikiran Ceramics Pvt. Ltd. in their plant located at Kanjari. And therefore both the parties decided and agreed to renew this production cum marketing job work agreement with the terms and conditions as follows. 1. That the party of second part carry out entire job work according to earlier terms and conditions at the factory premises of. party of the first part located at Kanjari having registered office at Anand. 2. That the second part will perform entire job work consisting aluminium rings, magnesia big gears etc. with technical aspects like size specification weight, bulk density, strength etc. to the standard of Sud Chemie India Pvt. Ltd. 3. That the second part will provide advice, technical expertise job-work quality, supervision etc. of ceramic items. 4. That the second part will procure job work orders from Sud Chemie India Pvt. Ltd. from time to time complete the work in time as per speciation and standard, get approval of the job work item to be delivered collect payment of bills issued by party of the first to M/s. Sud Chemie India Pvt. Ltd.. 5. That the party of the first part will give 4 % (four percent) commission on sales as well as job work value per annum as approved and confirmed by Sud Chemie India Pvt. Ltd. to the party of the second part. 6. That the durations of this agreement shall be for a period ten years which may be renewed for further years as may be mutually agreed by both the parties. 7. That all disputes and difference whatsoever arise between the parties hereto shall be referred to sole arbitrator to be appointed by common understanding of I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 8 each parties subject to the provision of Indian Arbitration Act, 1940 and the award shall be binding to both the parties to the dispute. In witness whereof, the parties have hereunto set and subscribed their respective hands on the 1st day April, 2005, hereinbelow written 15. As transpires from the contents of the agreements as above, Jyoti Electric and Falguni Traders were distributors entrusted with the job of ensuring sales of the goods of the assessee. While in the case of Parul Traders, the scope of work was confined to carrying out the job work order of Sud Chemie India Pvt. Ltd. and also to procure more job work orders. All the parties were to be remunerated by way of commission @ 4% of the sales. In the case of Parul Traders it was 4% commission on sales as well as job work value per annum as approved and confirmed by Sud Chemie India Pvt. Ltd. 16. In this backdrop of the scope of work of the agents as derived from the agreements entered into with them by the assessee, we shall now consider the evidences of services rendered by these distributors filed by the assessee. As stated above, they are copies of correspondence between the assessee and the distributors and between the distributors and the customers. A perusal of these evidences placed before us at page no. 20 to 43 in the case of Jyoti Trading company, page no. 49 to 53 in the case of Parul Traders and page no.68 to 80 in the case of Falguni traders reveals that the communication between the assessee and the distributors is with regard to C forms of certain parties not received by the assessee and regarding deposit of certain cheques by the distributors of the assessee in the bank. In the case of Parul Traders though the agreement confines the scope of work of the agent with respect of Sud Chemie only but the correspondence filed before us of Parul Traders with the assessee is with respect to C-form of some other party placed at paper book page no. 51 to 53. Further in the case of Parul Traders certain documents have been placed which are communication of Parul Traders to the assessee mentioning the work orders placed with M/s. Sud Chemie India Pvt. Ltd. for the different months during the year placed at paper book page no. 54 to 56. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 9 17. All the evidences placed before us are communication inter se between the assessee and the agents who at the cost of repetition we may point out are related to the assessee being persons specified u/s. 40A(2)(b) of the Act. There is not a single third party communication or correspondence evidencing any work done by these parties as distributors or executors of job work in the case of Parul Traders for the assessee. Even otherwise the evidences to the effect of communications with the agents regarding Obtaining C-forms or depositing cheques, does not show that these agents were acting as distributors of the assessee .As per the agreement they were responsible for procuring sales, developing business and acting on behalf of the assessee for the said purpose in specified areas. The agreement also mentions that the accounts between the assessee and the agents were to be correlated every three months. The assessee has not produced a single document evidencing the distributorship work done by these agents. Not a single document evidencing work done by the distributors for procuring and enhancing sale of the assessee. Not even the statement showing the amounts of sales procured by these parties for the assessee from their respective regions, correlated with the accounts of the assessee, as mentioned in the agreements, has been filed, When as per the agreement this is an internal document which could have been easily available with the assessee. We therefore find that the evidences filed by the assessee were not sufficient to demonstrate the rendering of services by these distributors to the assessee. The fact of service tax being paid by the distributors or TDS being deducted by the assessee on payments made to them does not demonstrate the factum of actual services rendered by the distributors. We therefore concur with the authorities below that the factum of any services rendered by the distributors/agents has not been established by the assessee at all, the evidences furnished by the assessee we hold are not sufficient to establish the said fact as dealt with by us. 18. Since the evidences were not sufficient enough the onus/burden of proof for establishing the said facts remained with the assessee and did not shift to the revenue. The contention of the ld. Counsel for the assessee therefore that the burden of proof shifted to the revenue does not merit consideration. Having I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 10 found the evidences to be insufficient to prove the claim of the assessee, there was no need for the revenue to have made any enquiry with regards to the same and the onus rested on the assessee only to prove its claim. Having said so, we shall now deal with the contention of the assessee that the claim having never been disallowed in the past or succeeding years, following the principle of consistency, the settled and accepted position ought not to have been distributed. In this regard, Ld. Counsel for the assessee has filed a chart showing year-wise commission payment in the case of Ravikiran Ceramic as under: Details of sales commission: NAME OF AGENT 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 SHREE JYOTI ELECT TRADING CO 5055542 4879740 4635255 5048942 5341445 3656281 FALGUNI TRADERS 2826058 2862184 2627784 2690409 3143818 2764431 PARUL TRADERS 1042147 915937 870869 738203 705867 574574 19. He further placed the copies of assessment years in Assessment Year 2015- 16, 2017-18 & 2018-19 pointing out that no disallowance of commission was made in these years even in scrutiny assessment. Ld. Counsel has further pointed out that though such disallowance was made an Assessment Year 2014-15 but the same were allowed by the Ld. CIT(A). Copies of the assessment order and the ld. CIT(A) for the said years were placed before us. 20. We have considered the contention of the ld. Counsel for assessee. No doubt the assessee has been paying commission for the past many years and which has never been disallowed in scrutiny assessment. But the assessment orders reveal that the issues were was never examined in those years and in Assessment Year 2014-15 where it was examined the A.O. disallowed the same for the same reason for lack of evidence of services rendered by the agents. Ld. I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 11 CIT(A)’s order reveals that while deleting the disallowance he did not deal with the aspect of evidence for rendering service but deleted it on the ground that since the agents have paid taxes on the same it is a revenue neutral exercise. Therefore the fact that the assessee has been claiming and has been allowed the said claim in scrutiny assessment for the past many years, we find does not help the case of the assessee. More particularly when the detailed scrutiny in this year brought out facts revealing that there was no basis and reason for paying the commission to these agents who even otherwise were closely related to the assessee, since the assessee was unable to demonstrate any service rendered by them as distributors. The principle of res judicata does not apply to Income Tax proceedings and the facts of each year have to be considered and merely because the claim has been allowed all these years without being examined, does not make the claim legitimate despite evidences on record proving to the contrary. The case laws relied by the Ld. Counsel for the assessee in this regard, are all distinguishable on facts. Therefore, this contention of the ld. Counsel for the assessee that following the principle of consistency the claim ought to have been allowed in those years is also rejected. 21. As per the third contention that the disallowance in any case could not have been made u/s. 40A(2)(b) of the Act where the genuineness cannot be brought into question and only the fair market value of the transaction with specified persons can be determined and the excess paid over it be disallowed, we find merits no consideration also. For the reason that the A.O. has not invoked Section 40A(2)(b) for the purposes of making the disallowance. The A.O. we find has only referred to the Section for pointing out that the agents were closely related to the assessee qualifying as specified persons as per the said section and the disallowance has been made finding the claim to be ingenuine in terms of Section 37(1) of the Act. Therefore this contention of the assessee is also rejected. 22. As for the contention of the Ld.Counsel for the assessee that the disallowance even if made would be a tax neutral exercise since the commission agents have paid taxes on the same in their hands, the same merits no I.T.A No. 396 & 397/Ahd/2018 A.Y. 2013-14 Page No Ravikiran Ceramic P. Ltd. & Mangalya Ceramics vs. DCIT 12 consideration since the expenses have been found to be in-genuine and no shelter under the tax neutrality principle can be given to such cases of claims found to be not genuine. 23. In view of the above, the disallowance of commission expenses amounting to Rs. 86.03 lakhs in the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018 and Rs. 39,21,215/- in the case of Mangalya Ceramic in ITA No. 396/Ahd/2018 is upheld. 24. In the result, both the appeals in ITA Nos. 396 & 397/Ahd/2018 are dismissed. Order pronounced in the Open Court on 13-03-2023 Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 13/03/2022 Rajesh/