DAGA GLOBAL CHEMICALS LTD, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX-12(2)(1), MUMBAI

ITA 5296/MUM/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7272 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 14-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAM TIWARI
• Assessee Lawyers: RAHUL K HAKANI; DR K SHIVARAM
• Keywords: Related party transaction; Capital asset; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Services rendered outside India; Permanent establishment; Wholly owned subsidiary; Fair market value; Speculation loss
• Section: 92E; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ' D ' BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA , ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH , JUDICIAL MEMBER ITA NO. 5296 /MUM/ 2017 (ASSESSMENT YEAR: 2014 - 15 ) M/S. DAGA GLOBAL CHEMICALS P. LTD. 101, MAHEK PLAZA OFF L.T. ROAD, MAHARASHTRA NAGAR LANE, BORIVALI (W) MUMBAI 400092 VS. D C I T - 12(2)(1) ROOM NO. 223/262 2ND FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI 400020 PAN AAACD2233M APPELLANT RESPONDENT ITA NO. 5889 /MUM/ 2017 (ASSESSMENT YEAR: 2014 - 15 ) D C I T - 12(2)(1) ROOM NO. 223/262 2ND FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI 400020 VS. M/S. DAGA GLOBAL CHEMICALS P. LTD. 101, MAHEK PLAZA OFF L.T. ROAD, MAHARASHTRA NAGAR LANE, BORIVALI (W) MUMBAI 400092 APPELLANT RESPONDENT ASSESSEE BY: DR. K. SHIVARAM & SHRI RAHUL K HAKANI REVENUE BY: SHRI RAM TIWARI DATE OF HEARING: 06.04 .2018 DATE OF PRONOUNCEMENT: 02 . 0 5 .2018 O R D E R PER SHAMIM YAHYA , A M THESE CROSS APPEAL S HAVE BEEN FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF THE CIT(A) - 20 , MUMBAI DATED 21 . 06 .201 7 FOR A.Y. 2014 - 15 . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 2 DISALLOWANCE OF COMMISSION EXPENSES OF RS 6,67,03,097 / - U/S 40 A(2 ) 1. THE LEARNED CIT(A) ERRED IN DISALLOWING COMMISSION EXPENSES PAID TO DAGA LIFE SCIENCES DMCC TO THE EXTENT OF RS 6,67,03,097/ - U/S 40A(2) ON THE GROUND THAT EXPENSE OF COMMISSION TO RELATED PARTY IS UNREASONABLE AND EXCESSIVE WITHOUT APPRECIATING A FACT THAT SECTION 40A(2) IS NOT APPLICABLE IN OUR CASE AS DAGA LIFE SCIENCES DMCC, DUBA I IS NOT A RELATED PARTY AS PER SECTION 40A(2)(B) AND DEFINITION OF ASSOCIATED ENTERPRISES U/S. 92E CANNOT BE RESORTED TO FOR INVOKING SEC. 40A(2) AND HENCE, THE DISALLOWANCE OF RS 6,67,03,097/ - OUGHT TO BE DELETED. 2. THE LEARNED CIT(A) ERRED IN DISALLOWING COMMISSION EXPENSES PAID TO DAGA LIFE SCIENCES DMCC TO THE EXTENT OF RS 6,67,03,097/ - U/S 40A(2) ON THE GROUND THAT EXPENSE OF COMMISSION TO RELATED PARTY IS UNREASONABLE AND EXCESSIVE WITHOUT TAKING INTO ACCOUNT THAT COMMISSION EXPENSES INCURR ED BY ASSESSE IS REASONABLE AND NOT EXCESSIVE AND THAT THE LD. AO HAS NOT DISCHARGED HIS ONUS OF BRINGING ON RECORD THE FAIR MARKET VALUE OF SERVICES AS REQUIRED U/S 40A(2)(A) AND THAT THE LD. CIT(A) WRONGLY INTERPRETED RBF'S EXCHANGE CONTROL MANUAL FOR IM PORT AND EXPORT AND CUSTOMS CIRCULAR NO. 64/2003 DATED 21.7.2003 FOR BENCHMARKING RATE OF COMMISSION AND HENCE, THE DISALLOWANCE OF RS 6,67,03,097/ - OUGHT TO BE DELETED. 3. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT IDENTICAL COMMISSION WAS PAID TO DAGA LIFE SCIENCES DMCC, DUBAI IN EARLIER ASSESSMENT YEAR AND THERE IS NO CHANGE IN FACTS IN THE CURRENT YEAR AND HENCE, ON THE GROUND OF CONSISTENCY, ENTIRE FOREIGN COMMISSION PAID TO DAGA LIFE SCIENCES DMCC, DUBAI OUGHT TO BE ALLOWED. DISALLOWANCE OF COMMISS ION EXPENSES OF RS 7,38,05,757/ - U/S 40(A)(I) 4. THE LEARNED CIT(A) ERRED IN ALTERNATIVELY CONFIRMING DISALLOWANCE OF COMMISSION EXPENSES OF RS 7,38,05,757/ - U/S 40(A)(I) WITHOUT APPRECIATING A FACT THAT AS PER INDIA - UAE TREATY, FOREIGN AGENT HAS NO PERMA NENT ESTABLISHMENT IN INDIA AND COMMISSION IS PAID TO THIS FOREIGN AGENT FOR SERVICES RENDERED OUTSIDE INDIA, AND HENCE, DISALLOWANCE U/S 40(A)(I) OUGHT TO BE DELETED. DISALLOWANCE OF SERVICE TAX 5. THE LEARNED CIT(A) WHILE COMPUTING COMMISSION TO BE DISALLOWED ERRED IN REDUCING PURPORTED REASONABLE COMMISSION ALLOWABLE OF RS 1,06,53,990/ - BEING 3% OF EXPORT TURNOVER FROM RS.7,73,57,087/ - AND THEREBY DISALLOWING SERVICE TAX PAID WHICH IS AN ALLOWABLE EXPENSE U/S 37 R.W.S 43B. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ENHANCING THE COMMISSION PAID WITHOUT ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 3 APPRECIATING THE FINDINGS OF THE A.O WHO RESTRICTED THE COMMISSION PAID WITHOUT APPR ECIATING THE FINDINGS OF THE A.O. WHO RESTRICTED THE COMMISSION ON THE BASIS OF THAT THE SUCH COMMISSION IS UNREASONABLE AND EXCESSIVE PAID TO OVERSEAS PARTY WHO IS VERY CLOSED AND RELATED TO ASSESSEE COMPANY WHICH CLEARLY ATTRACT THE PROVISION OF SECTION 40A(2)(B) OF THE ACT. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE APPEAL OF ASSESSEE ON ACCOUNT OF DISALLOWANCE MADE FOR NON DEDUCTION OF TAX AT SOURCE ON THE PAYMENT OF COMMISSION OF RS.7 ,38,05,757/ - PAID TO OVERSEAS PARTY WITHOUT APPRECIATING THE FACT THAT THE ASSESSING OFFICER HAS ESTABLISHED DURING THE ASSESSMENT PROCEEDINGS THAT THE PAYMENT OF COMMISSION TO AGENT (RELATIVE) HAS ACCRUED AND ARISED IN INDIA AND IS SUBJECT TO TDS UNDER SE CTION 195. IN ABSENCE OF TDS, ENTIRE AMOUNT OF COMMISSION PAID IS DISALLOWED UNDER SECTION 40(A)(I). 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE TO CARRY FORWARD OF L ONG TERM CAPITAL LOSS OF RS.84,46,103/ - ON ACCOUNT OF LOSS AROSE MERELY INVESTMENT IN SHARES WITHOUT APPRECIATING THE FACTS THAT THE DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS DONE DEPTH SCRUTINY AND CAME TO CONCLUSION THAT SUCH GAIN OR L OSS IS NOT COMPUTED IN ABSENCE OF TRANSFER OF CAPITAL ASSETS. APROPOS THE ISSUE OF REASONABLENESS OF COMMISSION PAID: (CROSS APPEAL BY REVENUE & ASSESSEE) 4. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT, IT WAS OBSERV ED BY THE AO THAT THE ASSESSEE HAD SHOWN SALES OF ` 2,77,28,35,881/ - AND CORRESPONDING PURCHASES WERE AT ` 2,35,96,27,687/ - AND HAD DEBITED ` 8,47,56,071/ - AS COMMISSION AND BROKERAGE PAID UNDER THE HEAD 'OTHER EXPENSES'. FURTHER IT WAS OBSERVED BY THE AO THAT SALES COMMISSION OF ` 7,47,82,152/ - WAS PAID TO M/S. DAGA LIFE SCIENCE DMCC (DLS), DUBAI. THE AO ALSO NOTED MANAGEMENT OF THE DLS DUBAI, T HE RECIPIENT OF COMMISSION WAS HAVING CLOSE RELATIONSHIP WITH THE DIRECTORS OF THE ASSESSEE COMPANY AND THE COMMISSION PAYMENT TRANSACTION WAS BETWEEN RELATED PARTIES. THE DIRECTOR OF DLS, SHRI KIRTI KRISHNA DAGA IS THE BROTHER ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 4 OF DIRECTOR SHRI SATYEN DAGA OF THE ASSESSEE COMPANY. DURING THE COURSE OF HEARING FOR ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED BY THE A O TO PRODUCE THE BREAKUP ALONG WITH SUPPORTING DETAILS AND ALSO FURTHER REQUIRED TO PROVIDE INFORMATION AND JUSTIFY THE PAYMENT OF COMMISSION TO RELATED PARTY. THE ASSESSEE WAS ASKED TO FILE DETAILS OF BASIS OF COMMISSION PAID TO RELATIVES OF ` 7,47,82,152/ - ALONG WITH COPY OF LEDGER ACCOUNT, FORM 15CA AND 15CB. IN RESPONSE TO THE QUERY THE ASSESSEE HAD FURNISHED 'CONTRACT FOR PAYMENT OF COMMISSI ON', TABLE OF EXPORT TRADING SALES INDICATING SALE PRICE, COST OF PURCHASE, FREIGHT CHARGES, C & F CHARGES, INCENTIVES RECEIVED, COMMISSION PAID, SERVICE TAX ON COMMISSION PAID AND PROFIT TO THE ASSESSEE COMPANY. THE SAID WORKING WAS SUPPORTED BY FEW DEBIT NOTES (AND ALSO A CREDIT NOTE) FROM THE AGENT. FROM THE WORKING SUBMITTED BY THE ASSESSEE, IT WAS OBSE RVED BY THE AO THAT THE COMMISSION PAID TO RELATIVE PARTY WAS UN REASONABLE AND EXCESSIVE. THE AO OBSERVED THAT THE CONTRACT OF COMMISSION BETWEEN ASSESSE E AND DLS, WHICH ACTED AS AGENT ARE RELATED PARTIES AND THE CONTRACT WAS NOT A COMPREHENSIVE CONTRACT. IN FACT IT WAS ONLY A TWO PAGE CONTRACT. THE AO NOTED THAT NORMALLY THE ARM'S LENGTH CONTRACT CONTAINS MANY CLAUSES TO MAKE CONTRACT COMPLETE. HOWEVER, T HE AGREEMENT IN THE PRESENT CASE DEFINED THE RATE OF COMMISSION @ 5% TO 50%. FURTHER THE BASIS ON WHICH THE RATE OF COMMISSION WAS TO BE DECIDED WAS NOT SPECIFIED IN THE CONTRACT. IT WAS OBSERVED BY THE AO THAT THIS TWO PAGE 'CONTRACT' BETWEEN THE RELATED PARTIES WAS EXECUTED IN MUMBAI - INDIA DATED 1 ST DAY OF APRIL 2012, AND WAS NOT A COMPREHENSIVE CONTRACT. THE A O NOTED THAT NO TWO PROFESSIONAL PARTIES WILL ENTER INTO CONTRACT SO VAGUELY WORDED. THE TERMS OF CONTRACT ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 5 IMPLIES THAT THE COMMISSION SHOULD BE PAID AT A RATE OF 5% TO 50%. THE BASIS OF DIFFERENTIAL RATE (I.E. 5% TO 50%) OF COMMISSION BE CALC ULATED WAS NOT MENTIONED. THE AO ALSO OBSERVED THAT THE THERE WAS NO MENTION OF PRODUCTS, VALUE OF SALE, GEOGRAPHICAL TERRITORIES, CREDIT / PAYMENT TERMS BY C USTOMERS, RESPONSIBILITY FOR PAYMENT FROM PARTIES, WAREHOUSING OF GOODS, FOLLOW UP OF DELIVERY SCHEDULE, TERMS OF THE CONTRACT (TIME FOR RENEWAL OR TERMINATION), REIMBURSEMENT OF EXPENSES TO AGENT, COMPENSATION FOR BREACH OF CONTRACT ETC, SERVICE TAX LIABI LITY, INCOME TAX LIABILITY, ARBITRATION CLAUSE IN CASE OF DISPUTE (DISPUTE RESOLUTION CLAUSE) AND LEGAL ENFORCEABILITY (APPLICABLE CONTRACT ACT INDIA OR DUBAI). ALL THESE IMPORTANT ISSUES, NORMALLY FIND PLACE IN ANY VALID CONTRACT BETWEEN TWO PROFESSIONAL PARTIES WERE NOT MENTIONED IN THE CONTRACT. THUS CONTRACT WAS SILENT ON ALMOST ALL THESE IM PORTANT AND BASIC ISSUES. THE AO FURTHER OBSERVED THAT THE CONTRACT WAS SILENT ON THE EXPECTED SERVICES TO BE RECEIVED AND PROVIDED BY THE AGENT SITUATED AT DUBAI. T HE CONTRACT WAS ABSOLUTELY SILENT ON THE NATURE OF SERVICES TO BE PROVIDED BY THE AGENT I.E . DLS AT DUBAI OR IN ANY OTHER COUNTRY FOR INTERNATIONAL MARKETING OF PRODUCTS FOR A CONSIDERATION OF 5% TO 50% OF COMMISSION, IN VALUE OF ` 7.47 CRORES FOR THE YEAR UNDER CONSIDERATION. IT IS ALSO A MATTER OF FACT THAT THE PARTIES TO CONTRACT WERE RESIDENT OF TWO DIFFERENT COUNTRIES. THE TRANSACTIONS WERE INVOLVING CROSS BORDER TRANSACTION WHICH DEMAND STRICT COMPLIANCE OF DOMESTIC LAW ON RESPECTIVE COUNTRIE S AND INTE RNATIONAL LAWS. THE AO FOUND THAT THE CONTRACT PLACED ON RECORD IN SUPPORT OF PAYMENT OF COMMISSION WAS NOT UP TO THE MARK AND IT WAS TOO VAGU E AND GENERAL. THEREFORE, THE AO FOUND IT TO BE NOT A RELIABLE PIECE OF EVIDENCE. THE ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 6 ASSESSEE HAD NO EXPLANATION TO OFFER ON T HE SUBJECT MATTER. HENCE, THE AO RESTRICTED THE COMMISSION TO 1% OF TURNOVER (I.E. 35,51,33,000 X 1% = 35,51,330) AND BALANCE COMMISSION EXPENSES OF ` 7,73,57,087/ - (I.E. ` 8,09,08,417 ` 35, 51,330) WAS DISALLOWED BY THE A O. 5. BEFORE THE LEARNED CIT(A) THE ASSESSEE MADE ELABORATE SUBMISSION INFORMING THAT THE ASSESSEE HAS ENGAGED IN THE BUSINESS OF TRADING IN CHEMICALS/PETRO PRODUCTS AND ALLIED PRODUCTS AND EXPORT ITS PRODUCTS TO IRAN. DURING THE YEAR ASSESSEE HAS ENTERED INTO A CONTRACT WITH DLS, DUBAI, WHICH IS A COMPANY CONTROLLED BY SHRI KRITI KRISHAN DAGA, BROTHER OF THE DIRECTOR OF THE ASSESSEE COMPANY SHRI SATYEN DAGA. THE LEARNED CIT(A) OPINED THAT DUE TO FAMILY RELATION BETWEEN THE DIRECTOR OF THE ASSESSEE COMPANY AND TH E DIRECTOR OF THE AGENT IN DUBAI THIS CONCERN CANNOT BE SAID TO BE INDEPENDENT AND THESE ARE CONTROLLED BY THE SAME FAMILY MEMBERS THEREFORE THE DUBAI AGENT CANNOT BE SEEN AS AN INDEPENDENT AGENT, SINCE IT IS AN ASSOCIATE CONCERN OF THE ASSESSEE. THE LEARN ED CIT(A) ALSO REJECTED ASSESSEES CONTENTION THAT THE AGENT COMPANY DLS DUBAI IS NOT COVERED UNDER THE DEFINITION OF RELATED PARTIES AS PER SECTION 40A(2)(B). HE NOTED THAT THE TERM RELATED PARTY HAS DIFFERENT MEANING IN DIFFERENT LAWS. HE REFERRED TO TH E COMPANIES ACT, 1956, ACCOUNTI NG STANDARD AND INCOME TAX . HE OBSERVED THAT I N THE PRESENT CASE THE COMMISSION IS PAID BY THE APPELLANT TO THE AGENT DLS IN DUBAI WHICH WAS COMPANY OWNED BY SHRI KIRTI KRISHNA DAGA WHO WAS THE BROTHER OF DIRECTOR SHRI SATYEN DAGA OF THE ASSESSEE COMPANY. THESE FACTS CLEARLY ESTABLISH THAT DLS DUBAI IS A RELATED PARTY OF THE APPELLANT AS PER ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 7 PROVISIONS OF SECTION 40A(2)(B) AND ALSO AN ASSOCIATED ENTERPRISE OF THE APPELLANT AS PER PROVISIONS OF SECTION 92A, CLAUSE (J) OF THE IN COME TAX ACT. HENCE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) OPINED THAT I N VIEW OF THIS DISCUSSION THE CLAIM OF THE APPELLANT THAT DLS DUBAI IS NOT A RELATED PARTY OF APPELLANT IS FOUND TO BE DEVOID OF ANY MERIT AND THIS CLAIM IS REJECTED AND THE STA ND OF THE AO IN TREATING THE DLS DUBAI AS A RELATED PARTY OF APPELLANT IS UPHELD. HE OBSERVED THAT RELATED PARTY TRANSACTION REQUIRED TO BE MADE WHILE FILING THE RETURN OF INCOME BUT THE SAME WAS NEVER DONE. HE REFERRED TO SECTION 40A(2)(B) OF THE INCOME T AX ACT, 1961 (HEREINAFTER THE ACT) AND OBSERVED THAT THE ASSESSEE HAS NOT BENCHMARKED ITS INTERNATIONAL TRANSACTIONS OF PAYMENT OF COMMISSION TO DLS DUBAI WITH ANY OTHER COMPARABLE INSTANCE. HE OBSERVED THAT IT IS NOT ESTABLISHED THROUGH COGENT EVIDENCE THAT THE RATE OF COMMISSION PAID TO DLS DUBAI WAS FAIR AND REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF SERVICES PROVIDED BY THE AGENT TO THE ASSESSEE. HE OBSERVED THAT THE AO HAS REJECTED THE ASSESSEES CLAIM OF COMMISSION @22.78% BEING FAIR AND R EASONABLE AFTER NOTING THAT THE COMMISSION PAID TO DLS DUBAI HAS NO CONNECTION WITH THE NATURE OF GOODS SUPPLIED, VALUE OF SALES MADE, SERVICES RENDERED IN CONNECTION WITH SALES MADE IN IRAN AND SERVICE TAX, INCOME TAX AND OTHER TAX LIABILITY OF AGENT IN I NDIA, ETC. THE LEARNED CIT(A) FURTHER NOTED THAT THE RBI IN ITS EXCHANGE CONTROL MAN UAL FOR IMPORT AND EXPORT HAS SET AN UPPER CEILING OF 12.5% FOR AGENT COMMISSION ON EXPORTS. HE FURTHER STATED THAT THE CBEC HAS ISSUED A CUSTOMS CIRCULAR WHEREIN IT HAS BEEN DIRECTED THAT RBI HA NOT REVISED ITS EARLIER INSTRUCTIONS AS REGARDS THE LIMIT OF PAYMENT OF AGENCY COMMISSION AND IT WAS CLARIFIED ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 8 THAT THE FIELD FORMATIONS MAY CONTINUE TO PERMIT EXPORT BENEFITS ON FOB VALUE WITHOUT DEDUCTING AGENCY COMMISSION IF SUCH COMMISSION IS UP TO THE LIMIT OF FOB VALUE. FROM THESE RBI MANUAL AND CBEC CIRCULAR THE LEA RNED CIT(A) OPINED THAT THESE AUTHORITIES HAVE HELD THAT THE CEILING OF 12.5% FOR AGENCY COMMISSION ON EXPORT IS APPLICABLE. AGAINST THIS, IN THE PRESENT CASE THE PAYMENT OF COMMISSION BY THE ASSESSEE TO DLS DUBAI VARIED BETWEEN 5 TO 50% OF SALES VALUE AND THE AVERAGE RATE WAS WORKED OUT @22.78% OF THE SALES. THEREAFTER THE LEARNED CIT(A) OBSERVED THAT THERE IS NO DIRECT COMPARABLE COMMISSION PAYMENT MADE BY THE ASSESSEE WHICH COULD JUSTIFY THE PAYMENT OF COMMISSION VARYING BETWEEN 5 TO 50% OF THE SALES VAL UE PAID TO DLS DUBAI. H E F OU ND THAT SINCE THE DLS DUBAI IS A REGISTERED PARTY, ONE HAS TO LOOK INTO THE FACTS OF THE CASE TO ARRIVE AT A REASONABLE PERCENTAGE OF COMMISSION THAT CAN BE TREATED AS GENUINE BUSINESS EXPENSES HAVING REGARD TO THE FAIR MARKET V ALUE OF THE SERVICES RECEIVED BY THE ASSESSEE FROM DLS. THE LEARNED CIT(A) REFERRED TO THE DECISION OF M/S. DIAMOND TOOL INDUSTRIES WHEREIN COMMISSION @3% TO RELATED PARTY WAS HELD TO BE REASONABLE AS AGAINST 2.5% ALLOWED BY THE AO. THE RELEVANT PORTION OF THE LEARNED CIT(A)S CONCLUDING REMARKS IS EXTRACTED AS UNDER: - IT IS WELL - SETTLED LAW THAT THE A.O. CAN SCRUTINISE THE REASONABLENESS OF THE EXPENDITURE WITH REFERENCE TO THE CRITERIA MENTIONED IN THE SECTION 40A(2)(B). THE A.O. IS EXPECTED TO EXERCIS E HIS JUDGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL C AUSE HARDSHIP IN BONA FIDE CASES. THE REASONABLENESS OF ANY EXPENDITURE IS TO BE JUDGED 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 OR THE B ENEFIT DERIVED BY, OR ACCRUING TO, THE ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 9 TAXPAYER FROM THE EXPENDITURE. IN THIS LIGHT THE PAYMENT OF COMMISSION TO DLS DUBAI BY THE APPELLANT IS TO BE EVALUATED. IT IS SEEN THAT COMMISSION PAYMENT OF RS. 8.09 CRORES WAS MADE TO DLS ON TOTAL SALE OF RS. 35.51 CRORES WHICH COMES TO A RATE OF 22.78% WHICH IS DEFINITELY EXCESSIVE AND IN VIOLATION OF RBI AND CBEC GUIDELINES IN THIS REGARD. ACCORDINGLY THIS PAYMENT ATTRACTS DISALLOWANCE UNDER SECTION 40A(2)(B). AFTER CAREFULLY CONSIDERING THE APPELLANTS CONTENTIONS AND THE DOCUMENTS FILED BEFORE ME, I FIND THAT THE A.O. HAS RIGHTLY HELD THAT THE COMMISSION RATE OF 22.78% PAID TO THE DLS IS FAR IN EXCESS OF THE PREVAILING MARKET RATE OF 2 - 3% IN SUCH CASES. THE APPELLANT HAS NOT FILED EVIDENCE TO JUSTIFY THE EXCESSIVE CLAIM OF COMMISSION PAYMENT THROUGH COGENT EVIDENCE SUCH AS NATURE OF ANY SPECIAL SERVICES RENDERED BY DLS, EXPENSES INC URRED BY THE DLS, AND OTHER TRANSACTION RELATED FACTS AND CIRCUMSTANCES WHICH COULD JUSTIFY THE PAYMENT OF COMMISSION AT A MUCH HIGHER RATE TO DLS. IT IS NOTED THAT IN A SIMILAR CASE OF M/S DIAMOND TOOL INDUSTRIES, 108, UDYOG BHAVAN, SONAWALA ROAD, G ORREGAON (EAST), MUMBAI 400 051. PAN NO. AAAFD4673L VS J.C.I.T. CIRCLE 24(3), PRATYAKSHA KAR BHAVAN, C - 11 BANDRA KURLA COMPLEX, BANDRA (EAST ), MUMBAI 400 051, THE INCOME TA X APPELLATE TRIBUNAL MUMBAI D BENCH IN ITA NO. 136/MUM/2009, A.YR. 2005 6 VIDE ORDER DATED 14.12.2011 HAS HELD THAT THE PAYMENT OF COMMISSION @3% TO THE RELATED PARTY AS AGAINST 2.5% ALLOWED BY THE A.O. IS REASONABLE AND WILL MEET THE ENDS OF JUSTICE. THE A.O. HAS ADOPTED THE RATE OF 1% COMMISSION BEING REASONABLE AND THEREBY 'HOLDING THAT THE PAYMENT OF COMMISSION @ 21.78% IS EXCESSIVE HAVING REGARDS TO THE NATURE AND QUANTUM OF SERVICES RECEIVED BY THE APPELLANT. I N VIEW OF THIS DISCUSSION AND HAVING REGARD TO FULL FACTS OF THE CASE AND ORDER OF THE HON'BLE MUMABI TRIBUNAL IN THE CASE OF M/S DIAMOND TOOL INDUSTRIES IT WOULD BE FAIR AND REASONABLE IF INSTEAD OF THE RATE OF COMMISSION OF 1% AS TAKEN BY THE A.O., THE A LLOWABLE COMMISSION RATE IS TAKEN @ 3% OF TURNOVER OF ` 35,51,33,000/ - WHICH COMES TO ` 1,06,53,990/ - AS THE COMMISSION TO BE ALLOWED AS BUSINESS EXPENDITURE TO THE APPELLANT FOR THE YEAR. IN VIEW OF THIS DISCUSSION THE ADDITION MADE BY THE A.O. ON THIS ISSUE IS DIRECTED TO BE RESTRICTED TO ` 6,67,03,097/ - ( ` 7,73,57,087/ - - ` L,06,53,990/ - ). 6. AGAINST THE ABOVE ORDER, THE REVENUE AND THE ASSESSEE ARE IN CROSS APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE DLS DUBAI IS NOT A RELATED PARTY AS PER SECTION 40A(2)(B). HE SUBMITTED THAT THE LD. CIT(A) HAS WRONGLY ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 10 INVOKED SECTION 40A(2)(B). HE PLEADED THAT T H E ASSESSEE CANNOT BE SAID TO BE A RELATED PARTY U/S. 40A(2)(B). HE FURTHER SUBMITTED THAT THE PAYMENT OF COMMISSION IS DULY JUSTIFIED. HE SUBMITTED THAT THE PAYMENT IS MADE THROUGH BANKING CHANNELS, COMMISSION PAYMENTS IS DISCLOSED IN SHIPPING BILLS, COMMI SSION IS PAID PURSUANT TO WRITTEN AGREEMENT, THE THIRD PARTY HAS CONFIRMED THE ROLE OF THE AGENT. FURTHER, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE RATE OF COMMISSION IS DULY JUSTIFIED BY THE NATURE OF SERVICES RENDERED BY THE AGENT. FURTH ER, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD THE FAIR MARKET VALUE OF THE SERVICES AS REQUIRED U/S.40A(2)(B) FOR COMPUTING THE DISALLOWANCE. THE LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITTED THAT THE LD. CIT(A ) IS WRONG AND THE RE IS NO V IOL ATION OF RBI MANUAL AND CBEC CIRCULAR . HE FURTHER SUBMITTED THAT THE PROFIT FOR THE YEAR HAS DE CREASED PRIMARILY BECAUSE OF FOREIGN EXCHANGE LOSSES AND NOT BECAUSE OF PAYMENT TO FOREIGN AGENT. HE FURTHER SUBMITTED THAT THE CONTRACT BETWEEN THE PARTIES IS TO BE UNDERSTOOD AND THE ASSESSING O FFICER CANNOT GIVE HIS OPINION AND I NTERPRETATION TO THE CONTRACT. THE LD. COUNSEL OF THE ASSESSEE FURTHE R SUBMITTED THAT IN THE EARLIER ASSESSMENT YEARS, IN THE SCRUTINY ASSESSMENT , TH E PAYMENT OF COMMISSION HAS BEEN ALLOWED. HENCE, HE SUBMITTED THAT FOR THE CURRENT YEAR ON THE SAME FACTS, IT CANNOT BE SAID THAT THE COMMISSION PAID IS UNREASONABLE AND EXCESS IVE. IN THIS REGARD, THE LD. COUNSEL OF THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF RADHASOAMI SATSANG VS . CIT 193 ITR 321 (SC) AND CIT VS EXCEL INDUSTRIES LTD [2013] 358 ITR 295 (SC) . ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 11 8. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS NOT PROVIDED RELEVANT DETAILS BEFORE THE AUTHORITIES BELOW. HE SUBMITTED THAT NO DOCUMENT RELATING TO THE SERVICES PROVIDED AND HOW THE RATES OF COMMISSION WERE FIXED WERE SUBM ITTED BEFORE THE ASSESSING OFFICER. HENCE, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS NOT PROVIDED ALL THE RELEVANT DETAILS. HE FURTHER SUBMITTED THAT THE NATURE OF THE SERVICES HAS NOT BEEN PROPERLY EXPLAINED. HE SUBMITTED THAT THE RE VENUE IS VERY MUCH JUSTIFIED IN EXAMINING THE NATURE OF THE SERVICES. JUST BECAUSE COMMISSION HAS BEEN ALLOWED IN THE EARLIER YEAR, CANNOT JUSTIFY THE PAYMENT IN SUBSEQUENT YEARS WITHOUT ANY EXAMINATION. HENCE, HE SUBMITTED THAT THE NATURE OF THE COMMISSIO N AND THE RATES THEREOF HAS NOT BEEN PROPERLY EXPLAINED. HENCE, THE AUTHORITIES HAVE RIGHTLY CONSIDERED IT AS EXCESSIVE. 9. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. WE NOTE THAT THE ASSESSEE HAS PAID COMMISSION TO THE DAGA LIFE SCIENCES DMCC, DUBAI , WHICH IS CONTROLLED AND MANAGED BY BROTHER IN LAW OF THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY. WE FIND THAT IT IS THE SETTLED ISSUE THAT THE REVENUE CANNOT SEAT INTO THE BUSINESSMANS SHOES AND DECIDE WHAT IS REASONABLE. HOW EVER, WHEN TH E EXPLANATIONS GIVEN ARE NOT COGENT AND PROPER, THE REVENUE AUTHORITIES ARE NOT SUPPOSED TO PUT ON BLINKERS. IN THIS CASE, WE NOTE THAT FOR THE PAYMENT OF THE AFORE - SAID COMMISSION, THE ASSESSEE HAS REFERRED TO A CONTRACT IN THIS REGARD. THE S AID CONTRACT MAY BE GAINFULLY REPRODUCED AS UNDER: ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 12 CONTRACT FOR PAYMENT OF COMMISSION THIS CONTRACT MADE AT MUMBAI ON THIS 1 ST DAY OF APRIL, 2012 BETWEEN M/S DAGA GLOBAL CHEMICALS LTD., 112, DATTANI TRADE CENTER, CHANDAVARKAR ROAD, BORIVALI (WEST), MUMBAI - 400 092 THROUGH ITS DIRECTOR MS. KOKILA A. GADHIYA AGE 48 YEARS, OCCUPATION PROFESSIONAL, HEREINAFTER CALLED AND REFERRED TO AS 'THE PRINCIPAL' AND M/S. DAGA LIFE SCIENCES DMCC , HAVING OFFICE AT 2208, 1 - LAKE PLAZA, JUMEIRAH LAKES TOWERS, P.B.NO.309045, DUBAI, UAE , THROUGH ITS DIRECTOR SHRI KIRTI KRISHNA DAGA, AGED - 40 YRS, HEREINAFTER CALLED THE REFERRED TO AS THE 'AGENT'. T HE PRINCIPAL IS IN THE BUSINESS OF EXPORT OF GOODS/CHEMICALS FROM INDIA TO VARIOUS PARTS OF THE WORLD AND THE AGENT, WHO IS SITUATED OUT OF INDIA, HELPS THE PRINCIPAL IN SALE OF SUCH GOODS/CHEMICALS IN INTERNATIONAL MARKET. THE PRINCIPAL INTENDS TO PAY THE AGENT AND THE AGENT INTENDS TOVECELVE FROM THE PRINCIPAL A COMMISSION ON SUCH SALE OF GOODS/CHEMICALS OF THE PRINCIPAL, ON THE FOLLOWING TERMS AND CONDITIONS: - 1. THE PRINCIPAL WILL PAY TO THE AGENT A COMMISSION AT THE RATE OF 5% TO 50%, AS MAY BE FIXED BY MUTUAL CONSENT BETWEEN THE PRINCIPAL AND THE AGENT AT THE TIME OF UNDERTAKING THE EXPORT, TRANSACTION, ON THE FOB {FREE ON BOARD) VALUE OF SUCH GOODS/CHEMICALS EXPORTED BY THE PRINCIPAL FOR SA!E IN INTERNATIONAL MARKET WITH THE HELP OF THE AGENT. 2. THE COMMISSION WILL BE'PAID BY THE PRINCIPAL TO THE AGENT WITHIN 30 DAYS OF RECEIPT OF INVOICE, BILL OR ANY OTHER DOCUMENT FROM THE AGENT REQUIRING THEREIN THE PAYMENT OF COMMISSION. 3. THE COMMISSION WILL BE PAID BY THE PRINCIPAL TO THE AGENT BY WAY OF BANK TRANSFER TO THE BANK ACCOUNT OF THE AGENT. 4. IN CASE OF DEFAULT OR VIOLATION OF ANY OF THESE TERMS AND CONDITIONS OF THIS CONTRACT COMMITTED BY EITHER PARTY, THE OTHER PARTY WHO HAS NOT COMMITTED THE DEFAULT OR VIOLATION SHALL HAVE THE RIGHT TO TERMINATE THIS CONTRACT WITHOUT ANY NOTICE. 5. ALL RECEIPTS BY THE AGENT IN RESPECT OF THE PAYMENT MADE BY THE PRINCIPAL TOWARDS COMMISSION FOR SALE OF GOODS/CHEMICALS OF THE PRINCIPAL IN INTERNATIONAL MARKET SHALL BE CONSTRUCTED ONLY A PAYMENT OF COMMISSION UNDER THIS CONTRACT IRRESPECTIVE OF WHATSOEVER CONTAINED AND MENTIONED THEREIN. M/S DAGA GLOBAL CHEMICALS LTD M/S DAGA LIFE SCIENCES DMCC SD/ - SD/ - (KOK ILA A . GADH I YA) (KIRTI KRISHNA DAGA) DIRECTOR MANAGING DIRECTOR ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 13 10. THE ABOVE AGREEMENT HAS BEEN FOUND BY THE ASSESSING OFFICER AS TO BE NO T COMPREHENSIVE WARRANTING THE COMMISSION OF PAYMENT AS EXCESSIVE. WE FIND THAT IN THE ABOVE CONTRACT, THE RANGE OF COMMISSION HAS BEEN MENTIONED FROM 5% TO 50%. HOWEVER, IT HAS BEEN MENTIO NED THAT THE COMMISSION @ 5% TO 50% , AS MAY BE FIXED BY MUTUAL CONSENT BETWEEN THE PRINCIPAL AND THE AGENT AT THE TIME OF UNDERTAKING THE EXPORT, TRANSACTION . IN THIS REGARD, WE NOTE THAT NO DETAIL/CORRESPONDENCE/AGREEMENT REGARDING THE FIXAT ION OF INDIVID UAL R ATES IN PARTICULAR INVOICE HAS BEEN PRODUCED BEFORE THE AUTHORITIES BELOW. TO EXAMINE THE PAYMENT OF COMMISSION, IN ACCORDANCE WITH THE ABOVE CONTRACT, IT IS NECESSARY TO GO INTO THE CORRESPONDENCE WHEREIN A PARTICULAR RATE OF COMMISSION WAS F IXED. IN THIS REGARD, THE ASSESSEE HAS SUBMITTED BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS NOT ASKED FOR ANY EXPLANATION REGARDING THE TRANSACTION W ISE RATE OF COMMISSION. WE FIN D THAT DESPITE THE ABOVE SUBMISSIONS BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS), NO SUBMISSION IS ON RECORD AS TO HOW A PARTICULAR RATE HAS BEEN FIXED IN THE INDIVIDUAL CONTRACTS. TO GET THIS CLARIFICATION, THE BENCH HAS SPECIFICALLY ASKED THE LD. COUNSEL OF THE ASSESSEE TO PROVIDE THE NECESSARY DETAILS, BUT THE SAME HAS NOT BEEN PROVIDED. 11. WE FIND THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE NATURE OF RELATIONSHIP BETWEEN THE ASSESSEE COMPANY AND THE PAYEE AND A VERY SHORT CONTRACT FOR AGREEMENT OF COMMISSION AND LACK OF NECESSARY DETAILS OF RATE OF COMMISSION , THE AUTHORITIES BELOW HAVE CONCLUDED THAT THE ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 14 EXCESSIVE COMMISSION PAYMENT WAS NOT JUSTIFIED . THE A .O. HAS HELD THAT 1% COMMISSION WAS JUSTIFIED. HOWEVER, THE LD. C IT(A ) HAS HELD THAT 2.5% COMMISSION WAS JUSTIFIED. IN OUR CONSIDERED OPINION, SUCH SUBJECTIVE DECISION OF THE AUTHORITIES BELOW IS NOT CORRECT. IN THIS REGARD, THE LD. COUNSEL OF THE ASSESSEES SUBMISSION THAT THE AUTHORITIES BELOW CANNOT S I T IN JUDGMENT ON THE LENG TH OF THE CONTRACT, IS SUSTAINABLE. MORE SO, SINCE ON THE BASIS OF THE SAME CONTRACT, EARLIER ASSESSMENTS WERE COMPLETED. HOWEVER, IT IS CERTAINLY NECESSARY TO EXAMINE WHETHER THE PAYMENTS ARE IN ACCORDANCE WITH THE CONTRACT. THE ACTUAL COMMISSION PAID IF THE SAME IS IN ACCORDANCE WITH THE TERMS OF THE CONTRACT HAS TO BE ALLOWED. HOWEVER, IN THE PRESENT CASE, IT IS NOT ESTABLISHED THAT THE RATE OF COMMISSION PAID IS AS PER THE CONTRACT. THE MAIN CONTRACT SHOWS A RANGE OF COMMISSION AND IT MENTIONS THAT THE INDIVIDUAL RATES WILL BE FIXED AS PER THE MUTUAL CONSENT. NO DETAIL WHATSOEVER AS TO HOW THE MUTUAL CONSENT HAVE BEEN ARRIVED AT FOR A PARTICULAR RATE IN A PARTICULAR INVOICE HAS BEEN SUBMITTED BEFORE THE AUTHORITIES BELOW. IF ANY RATE CAN BE MENTION ED IN THE INVOICE AND THE PAYMENT CAN BE DONE, WITHOUT ANY REFERENCE TO ANY DOCUMENT RELATING TO CONSENT OF PARTIES IN AN INTERNATIONAL TRANSACTION , SUCH A PROPOSITION CAN BY NO STRETCH OF IMAGINATION BE CONSIDERED TO BE GENUINE. IN THE ABSENCE OF NECESSARY DETA ILS, ADVERSE INFERENCE DRAWN CANNOT BE SAID TO BE DEVOID OF COGENCY. BY NO STRETCH OF IMAGINATION, IT CAN BE SAID THAT BECAUSE COMMISSION HAS BEEN ALLOWED IN EARLIER YEAR, THE REVENUE AUTHORITIES NEED NOT EXAMINE THE CORRECTNESS OF THE COMMISSION PAID FOR THIS YEAR IN ACCORDANCE WITH THE RELEVANT CONSENT . HENCE, I N OUR CONSIDERED OPINION, THE INTEREST OF JUSTICE WILL BE SERVED IF THE ISSUE IS REMITTED TO THE FILE OF THE ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 15 A .O. THE A .O. IS DIRECTED TO EXAMINE THE DOCUMENTS BY WHICH THE MUTUAL CONSENT WAS ARRIVED AT FOR INDIVIDUAL INVOICES OF COMMISSION. IF THE RATES FIXED ARE IN ACCORDANCE WITH THE RELEVANT DOCUMENT S , THE COMMISSION PAYMENT WILL NEED TO BE ALLOWED. THE ASSESSEE IS ALSO D IRECTED TO COOPERATE WITH THE ASSESSING OFFICER AND PROVIDE THE NECESSARY DETAILS. OTHER GROUND IN ASSESSEES APPEAL APROPOS THE ISSUE OF DISALLOWANCE OF COMMISSION EXPENDITURE U/S.40(A)(I): 12. THE BRIEF FACTS OF THE CASE ARE THAT T HE A.O. IN THE ASSESSMENT ORDER HAS NOTED THAT THE RIGHT TO RECEIVE COMMISSION INCOME ARISES IN INDIA, SINCE THE SOURCE OF INCOME IS IN INDIA. FURTHER HE NOTED THAT THE ASSESSEE ITSELF PAID SERVICE TAX IN INDIA ON THIS COMMISSION. THE A.O. NOTED THAT INDIA N SERVICE TAX IS PAYABLE IN INDIA FOR AVAILING AND UTILIZING SERVICES OF FOREIGN CONCERN IN INDIA. THE A.O. HAS OBSERVED IN ITS ORDER THAT IT WOULD NOT BE OUT OF PLACE TO MENTION THAT THE AGENT WAS HAVING A BUSINESS CONNECTION IN INDIA. THE AGENT WAS A CLO SE RELATIVE OF ASSESSEE COMPANY (HE IS BROTHER OF DIRECTOR OF ASSESSEE - COMPANY). THE ASSESSEE HAD NOT PROVIDED SUFFICIENT INFORMATION ON THE NATURE OF SERVICE THAT SO CALLED AGENT HAD PROVIDED TO THE ASSESSEE COMPANY BEFORE THE A.O. NO PARTICULAR RATE OF COMMISSION IS ELABORATED. HENCE, THE ASSESSING OFFICER OPINED THAT WHETHER THE PAYMENT TO AGENT WAS PURE COMMISSION OR MANAGERIAL SERVICE OR TECHNICAL SERVICE WAS NOT CLEAR. THEREFORE, ON FACTS AND UNDER THESE CIRCUMSTANCES, IT WAS CONCLUDED THAT THE PAYME NT OF COMMISSION TO AGENT (RELATIVE) HAD ACCRUED AND ARISEN IN INDIA AND WAS REQUIRED TO BE SUBJECTED TO TDS UNDER SECTION 195. IN ABSENCE OF TDS, ENTIRE AMOUNT OF COMMISSION PAID OF ` 7,38,05,757/ - WAS DISALLOWED BY THE A.O . ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 16 13. UPON ASSESSEES APPEAL THE LEARNED CIT(A) CONFIRMED THE ADDITION BY HOLDING AS UNDER: - I HAVE GONE THROUGH THE ASSESSMENT ORDER OF THE A.O. AND THE SUBMISSIONS MADE BY THE ASSESSEE. DURING THE COURSE OF HEARING FOR ASSESSMENT PROCEEDINGS THE ASSESSEE SUBMITTED ITS SUBMISSION WHERE IN 'CONTRACT FOR PAYMENT OF COMMISSION' BETWEEN AGENT AND ASSESSEE WAS EXECUTED IN INDIA. THE A.O. HAD NOTED THAT THE RIGHT TO RECEIVE COMMISSION INCOME ARISES IN INDIA, SINCE THE SOURCE OF INCOME IS IN INDIA. FURTHER THE ASSESSEE ITSELF PAID SERVICE TAX I N INDIA. THE A.O. NOTED THAT THE INDIAN SERVICE TAX IS PAYABLE IN INDIA FOR AVAILING AND UTILIZING SERVICES OF FOREIGN CONCERN IN INDIA. HAVING REGARD TO THE FACTS OF THE CASE IT IS SEEN THAT THE APPELLANT HAS DEDUCTED SERVICE TAX ON THE COMMISSION PAID BU T FAILED TO DEDUCT TDS AS REQUIRED. IN ABSENCE OF TDS, ENTIRE AMOUNT OF COMMISSION PAID OF ` 7,38,05,757/ - WAS DISALLOWED BY THE A.O. HAVING REGARDS TO FACTS AND CIRCUMSTANCES OF THE CASE, I FIND MYSELF IN AGREEMENT WITH THE A.O. THAT THE PAYMENT OF COMMISSION TO AGENT HAD ACCRUED AND ARISEN IN INDIA AND WAS REQUIRED TO BE SUBJECTED TO TDS UNDER S ECTION 195. IT IS SEEN THAT THIS ADDITION IS ALREADY DISCUSSED IN PARA 6.4 ABOVE AND NO SEPARATE ADDITION WOULD BE REQUIRED TO BE MADE AS THE ISSUE STANDS COVERED IN PARA 6.4 ABOVE WHILE DECIDING GROUND NOS. 2 TO 6 OF APPEAL. HOWEVER ON TECHNICAL GROUNDS T HIS GROUND OF APPEAL IS DISMISSED. 14. AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BEFORE US. 15. WE HAVE HEARD BOTH THE C OUNSEL AND PERUSED THE RECORDS. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT NO DISALLOWANCE CAN BE MADE U/S.40(A)(I). HE SUBMIT TED THAT THE AGENT HAS NO BUSINESS CONNECTION IN INDIA AND THE COMMISSION PAID FOR THE SERVICES RENDERED BY THE FOREIGN AGENT OUTSIDE INDIA AND FURTHER AS PER INDIA - UAE TREATY, FOREIGN AGENT HAS NO PERMANENT ESTABLISHMENT . HE FURTHER SUBMITTED THAT THE SERVICES RENDERED BY THE AGENT OUTSIDE INDIA IS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE. 16. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 17. UPON CAREFUL C ONSIDERATION, WE NOTE THAT THE ASSESSING OFFICER ON THIS ISSUE HAS NOTED THAT THE CONTRACT BETWEEN THE PARTIES WAS EXECUTED IN INDIA. HE HAS FURTHER NOTED THAT THE RIGHT TO RECEIVE COMMISSION INCOME ARISES IN INDIA SINCE THE SOURCE OF INCOME IS IN INDIA. F URTHER, IT HAS BEEN NOTED THAT THE ASSESSEE ITSELF HAS PAID SERVICE TAX IN INDIA ON THIS ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 17 COMMISSION. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE AGENT IS CLOSE RELATIVE OF THE DIRECTOR OF THE ASSESSEE COMPANY , IT DID NOT PROVIDED SUFFICIENT INFORMATION ON THE NATURE OF SERVICE THAT SO CALLED AGENT HAS PROVIDED TO THE ASSESSEE COMPANY BEFORE THE ASSESSING OFFICER. THE RATE OF COMMISSION WAS VARYING. HENCE, WHE THER THE PAYMENTS ARE FOR SERVICES OR MANAGERIAL O R TECHNICAL SERVICES WAS NOT CLEAR. IN THIS REGARD, WE NOTE THAT IN ITS SUBMISSIONS BEFORE THE LD. CIT(A), THE ASSESSEE HAS HIMSELF SUBMITTED THAT THE AGENT HAS INCURRED EXPENSE S OF AUDIT BY IRAN MINISTRY OF HEALTH OFFICIALS, WHICH REQUIRED PAYMENT OF FIRS T/BUSINESS CLASS AIR TICKETS AND HOTEL EXPENSES FOR OFFICIALS VISITING SUPPLIERS FACTORY FOR INSPECTION , ETC. WE NOTE THAT BEARING OF SUCH EXPENDITURE IS NOT RISING OUT OF THE CONTRACT FOR PAYMENT. HENCE, IN WHICH CAPACITY SUCH PAYMENTS WERE DONE BY THE A GENT, HAS NOT BEEN BROUGHT ON RECORD. THE CONTRACT FOR PAYMENT AT ANY POINT NEVER ENVISAGES SUCH A PAYMENT BY THE AGENT. HENCE, ADMITTEDLY THE AGENT IS PROVIDING SERVICES WHICH ARE OUTSIDE THE PURVIEW OF CONTRACT OF PAYMENT FOR COMMISSION. HENCE, THE INF ER E NCE BY THE ASSESSING OFFICER IS NOT UNJUSTIFIED THAT THE ASSESSEE HAS NOT PROPERLY DISCLOSED THE NATURE OF THE PAYMENT WHETHER IT IS PURE COMMISSION OR MANAGERIAL SERVICES OR TECHNICAL SERVICES. IN THE ABSENCE OF NECESSARY DETAILS FROM THE ASSESSEE, THE A UTHORITIES BELOW HAVE DRAWN ADVERSE INFERENCE. IN THIS REGARD, WE NOTE THAT THE ASSESSING OFFICER IN HIS ORDER HAS OBSERVED THAT THE ASSESSEE HAS NOT PROVIDED ANY DETAILS OF THE CORRESPONDENCE, ETC. BETWEEN THE ASSESSEE AND THE AGENT IN JUSTIFICATION OF TH E TRANSACTION. THE ASSESSEE HAS NOT PROVIDED THE DETAILS, RATHER IT HAS BEEN CONTENDED THAT THE ASSESSING OFFICER HAS NOT CALLED FOR ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 18 C OMMUNICATION BETWEEN THE ASSESSEE AND THE AGENT AS EMANATING OUT OF THE GROUND RAISED BEFORE THE LD. CIT(A) . WE FIND THAT THE POSITION TAKEN BY THE ASSESSING OFFICER AND THE ASSESSEE ARE CONTRADICTORY. IN OUR CONSIDERED OPINION, THE INTEREST OF JUSTICE WILL BE SERVED IF THE ISSUE IS REMITTED TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL EXAM INE THE CORRESPONDENCE BETWEEN THE ASSESSEE AND THE AGENT AND THEREAFTER DECIDE THE ISSUE REGARDING THE NATURE OF THE SERVICES RENDERED. FURTHERMORE, THE CLAIM THAT THE PAYEE IS A RESIDENT OF UAE ALSO NEEDS TO BE ESTABLISHED BY REFERENCE TO THE RELEVANT DO CUMENT S, REGULATIONS AND TREATY . NEEDLESS TO ADD, THE ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD. APROPOS GROUND NO. 5 REGARDING THE DISALLOWANCE OF SERVICE TAX : 18. WE FIND THAT THE GROUNDS RAISED IN THIS REGARD READS AS UNDER: D ISALLOWANCE OF SERVICE TAX 5. THE LEARNED CIT(A) WHILE COMPUTING COMMISSION TO BE DISALLOWED ERRED IN REDUCING PURPORTED REASONABLE COMMISSION ALLOWABLE OF RS 1,06,53,990/ - BEING 3% OF EXPORT TURNOVER FROM RS.7,73,57,087/ - AND THEREBY DISALLOWING SERVICE TAX PAID WHICH IS AN ALLOWABLE EXPENSE U/S 37 R.W.S 43B. 19. WE FIND THAT THIS GROUND IS NOT EMANATING OUT OF THE ORDERS OF THE AUTHORITIES BELOW. HOWEVER, SINCE WE HAVE ALREADY REMITTED THE ISSUE OF EXAMINATION OF COMMISSION PAID TO THE FILE OF THE ASS ESSING OFFICER, THE ASSESSING OFFICER SHALL EXAMINE THIS ISSUE ALSO. FURTHERMORE, IT IS NOTED HERE THAT THE SAID SERVICE TAX HAS BEEN PAID BY THE ASSESSEE ON THE SERVICES RENDERED BY THE DUBAI BASED AGENT. FIRST LY , HOW CAN THE SERVICE TAX ARISES WHEN THE S ERVICES HAS BEEN RENDERED OUTSIDE INDIA AND SECONDLY, UNDER WHAT LIMB OF CONTRACT THE ASSESSEE WAS TO INCUR THE SAID EXPENSES INSTEAD ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 19 OF THE AGENT, ALSO NEEDS TO BE EXAMINE D . THE ASSESSING OFFICER WHILE EXAMINING THIS ISSUE SHALL BEAR IN MIND OUR ABOVE OBS ERVATIONS. OTHER GROUND IN REVENUES APPEAL: APROPOS THE ISSUE OF ALLOWING OF CARRY FORWARD OF LONG TERM CAPITAL LOSS : 20 . B RIEF FACTS ARE THAT IN THIS REGARD THE AO NOTICED THAT THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS IN THE RETURN OF INCOME. THE SAME WAS CLAIMED ON WRITE OFF OF INVESTMENT IN FOREIGN SUBSIDIARY COMPANY. HOWEVER, THE AO NOTED THAT SINCE IT WAS NOT A CASE OF TRANSFER OF CAP ITAL ASSET BUT A WRITE OFF, UNDER THE CIRCUMSTANCES, SECTION 48 WILL NOT COME INTO PLAY. THEREFORE, TO EXAMINE THIS CLAIM, THE A.O. ISSUED A SHOW CAUSE VIDE ORDER SHEET NOTING DATED 18.11.2016 TO THE ASSESSEE. THE ASSESSEE IN ITS REPLY AT POINT NUMBER 5 HA D STATED AS FOLLOWS: '...5. HENCE, THIS IS NOT SALE OF SHARES, HENCE IT IS NOT SPECULATION LOSS AND NOT TO BE TREATED AS SPECULATION LOSS UNDER SECTION 73 OF THE ACT AND WE WOULD HUMBLY REQUEST YOU TO ALLOW IT TO CARRY FORWARD AS LONG TERM CAPITAL LOSS....' 2 1 . IT SEEN THAT THE AO OBSERVED FROM THE SUBMISSIONS MADE BY THE ASSESSEE THAT THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS OF ` 84,46,013/ - ON WRITE OFF OF INVESTMENT IN WHOLLY OWNED SUBSIDIARY (WOS) COMPANY AT CHINA. THE CLAIM OF ASSESSEE AND REPLY WAS CLOSE LY SCRUTINIZED BY THE A.O. THE ASSESSEE COMPANY REPLIED THAT THE ASSESSEE COMPANY HAD NOT SOLD THESE SHARES. THE ASSESSEE COMPANY HAD INVESTED IN ITS WOS AT CHINA. THE WOS HAD INCURRED LOSSES SINCE INCEPTION IN YEAR 2009 TILL THE PREVI OUS YEAR. LOSSES OF THE COMPANY HAD WIPED OUT INVESTMENT OF ASSESSEE COMPANY AND IN JUNE 2014, THE ASSESSEE COMPANY PASSED A RESOLUTION FOR CLOSURE OF THE COMPANY. THE CLAIM OF THE ASSESSEE THAT THE ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 20 INVESTMENT IN WOS WAS WRITTEN OFF IN THE PREVIOUS YEAR BE ALLOWED AS LONG TERM CAPITAL GAIN (LOSS), WAS NOT FOU ND ACCEPTABLE BY THE AO. THE AO NOTED THAT THE ASSESSEE COMPANY HAD NOT TRANSFERRED ANY OF ITS CAPITAL ASSET DURING THE IMPUG NED YEAR UNDER CONSIDERATION. THE CONDITION UNDER SECTION 48 FOR CALCULATI ON OF CAPITAL GAIN ARISES ONLY ON TRANSFER OF CAPI TAL ASSET. THE AO OBSERVED THAT THERE WE RE NO NEW ARGUMENTS FURNISHED BY THE ASSESSEE COMPANY. THE ASSESSEE REITERATED ITS STAND THAT THE LOSS WAS NOT DUE TO SALE OF SHARES OF WHOLLY OWNED SUBSIDIARY BUT O N ACCOUNT OF WRITE OFF OF SHARE INVESTMENT FROM BOOKS OF ACCOUNTS, THEREFORE IN THE ABSENCE OF TRANSFER OF CAP ITAL ASSET AND FOR REASONS MENTIONED IN THE SHOW CAUSE, CAPITAL LOSS ON SHARE INVESTMENT WRITTEN OFF WAS NOT FOUN D TO BE ALLOWABLE BY THE AO. HE NCE, IN VIEW OF THE SAME, THE CLAIM OF ASSESSEE TO ALLOWING CARRY FORWARD OF LONG TERM CA PITAL LOSS OF ` 84,46,013/ - WAS REJECTED BY THE A.O. AND THE SAME WAS ADDED TO THE TOTAL INCOME. 2 2 . UPON ASSESSEES APPEAL THE LEARNED CIT(A) DIRECTED THAT THE ASSESSEES CLAIM OF CARRY FORWARD OF CAPITAL LOSS WAS FOUND TO BE IN ORDER. THE LEARNED CIT(A) OBSERVED IN THIS REGARD AS UNDER: - I HAVE GONE THROUGH THE ASSESSMENT ORDER OF THE A.O. AND THE SUBMISSIONS MADE BY THE ASSESSEE. IT SEEN THAT THE AO OBSERVED FROM THE SUBMISSIONS MADE BY THE ASSESSEE THAT THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS OF ` 84,46,013/ - ON WRITE OFF OF INVESTMENT IN WHOLLY OWNED SUBSIDIARY COMPANY AT CHINA. THE CLAIM OF ASSESSEE AND REPLY WAS CLOSELY SCRUTINIZED BY THE A.O. THE ASSESSEE COMPANY REPLIED THAT THE ASSESSEE COMPANY HAD NOT SOLD THESE SHARES. THE ASSESSEE COMPANY HAD INVESTED IN ITS WOS AT CHINA. THE WOS HAD INCURRED LOSSES SINCE INCEPTION IN YEAR 2009 TILL THE PREVIOUS YEAR. LOSSES OF THE COMPANY HAD WIPED OUT INVESTMENT OF ASSESSEE COMPANY AND IN JUNE 2014, THE ASSESSEE COMPANY PASSED A RESOLUTION FOR CLOSURE OF THE COMPANY. THE CLAIM OF THE ASSESSEE THAT THE INVESTMENT IN WOS WAS WRITTEN OFF IN THE PREVIOUS YEAR BE ALLOWED AS LONG TERM C APITAL GAIN (LOSS), WAS NOT FOUND ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 21 ACCEPTABLE BY THE A.O . THE APPELLANT HAS VEHEMENTLY OPPOSED THE ADDITIONS MADE AND SUBMITTED THAT THE LEARNED AO ERRED IN NOT ALLOWING CARRY FORWARD OF LONG TERM CAPITAL LOSS OF RS 84,46,013/ - BEING LOSS ARISING ON ACCOUNT OF INVESTMENT IN WHOLLY OWNED SUBSIDIARY IN CHINA, WHICH WENT UNDER WINDING UP DURING THE ASSESSMENT YEAR, AND THUS, SAID LOSS WAS REAL AND ALLOWABLE TO BE CARRIED FORWARD AS CAPITAL LOSS. IT IS NOTED THAT THE APPELLANT HAD CLAIMED LONG TERM CAPITAL LOSS OF ` 84,46,013/ - ON WRITE OFF OF INVESTMENT IN WHOLLY OWNED SUBSIDIARY COMPANY AT CHINA AND HAS CLAIMED CARRY FORWARD OF THIS LOSS IN BOOKS AS CAPITAL LOSS. IT IS NOT IN DISPUTE THAT THE LOSS WAS ON ACCOUNT OF WRITE OF INVESTMENT IN SUBSIDIARY COMPANY OF AP PELLANT. IT IS NOTED THAT ONCE THESE FACTS ARE APPRECIATED IT IS DIFFICULT TO SUSTAIN TH E DISALLOWANCE MADE BY THE A.O. HAVING REGARD TO THE FACTS OF THE CA SE AND SUBMISSIONS MADE BY THE APPELL ANT THE CLAIM OF THE CARRY FORWARD OF CAPITAL LOSS IS FOUND TO BE IN ORDER AND TH E SAME IS ALLOWED TO BE CARRIED FORWARD AS PER PROVISIONS OF THE INCOME TAX ACT, 1961. 2 3 . AGAINST THIS ORDER REVENUE IS IN APPEAL BEFORE US. 2 4 . WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORDS. THE LD. COUNSEL OF THE ASSESSEE IN THIS REGARD PLACED RELIANCE UPON THE ORDER OF THE LD. CIT(A). HE SUBMITTED THAT THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS OF RS.84,46,013/ - ON WRITE OFF OF IN VESTMENT IN WHOLLY OWNED SUSIDIARY (WOS) COMPANY AT CHINA. HENCE, IN VIEW OF THE ABOVE, THE ASSESSEE IS ENTITLED TO CARRY FORWARD LOSS OF RS.84,46,013/ - . WITH OUT PREJUDICE, HE SUBMITTED THAT THERE IS A CAPITAL LOSS OF RS.84,46,013/ - AS THE ENTIRE INVESTMEN T IS WIPE D OFF AND THE ASSESSEE IS ENTITLED TO CARRY FORWARD THE CAPITAL LOSS. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED THE REVENUE LOSSES. THE LD. COUNSEL OF THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. WACKHARDT INTERNATIONAL LTD. [2009] 314 ITR 11 (BOM) . 25. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE ASSESSING OFFICER. ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 22 26. UPON CAREFUL CONSIDERATION , WE NOTE THAT THE ASSESSEE IN THIS CASE HAS WRITTEN OFF ITS INVESTMENT IN ITS WHOLLY OWNED SUBSIDIARY IN CHINA AS THERE WAS PERSISTENT LOSS AND THE NET WORTH WAS ERODED. THE ASSESSEE HAS CLAIMED THIS TO BE ALLOWED AS LONG TERM CAPITAL LOSS TO BE CARRIED F ORWARD. WE FIND THAT THE ASSESSING OFFICER IS QUITE CORRECT IN HOLDING THAT THE LONG TERM CAPITAL LOSS CAN ARISE ONLY AS PER THE MODE OF COMPUTATION AS SPECIFIED IN SECTION 48 OF THE I. T. ACT. SINCE IN THE PRESENT CASE, THE CLAIM OF LONG TERM CAPITAL LOSS DOES NOT ARISE BY WAY OF COMPUTATION AS PER THE MODE PRESCRIBED IN SECTION 48 OF THE I. T. ACT, THE SAME CANNOT BE ALLOWED AS LONG TERM CAPITAL LOSS. IN THIS REGARD, WE FIND THAT THE LD. CIT(A) HAS ERRED IN APPRECIATING THE RELEVANT PROVISIONS. FURTHERMOR E, WE NOTE THAT THIS L OSS I S IN THE NATURE OF CAPITAL FIELD; HENCE IT IS THE CAPITAL LOSS. THERE IS NO PROVISION IN INCOME TAX L AW REGARDING THE CARRY FORWARD OF LOSS IN CAPITAL FIELD . FURTHERMORE, WE NOTE THAT THE LD. CIT(A) HAS RELIED UPON THE DECISION O F THE WACKHARDT INTERNATIONAL LTD (SUPRA). WE FIND THAT THE SAME IS NOT AT ALL APPLICABLE ON THE FACTS OF THE CASE, AS THE SAME WAS WITH REFERENCE TO THE NON REFUND OF CUSTOM DUTY WHICH WAS TREATED AS BUSINESS LOSS/EXPENDITURE. HERE AS CLEARLY BROUGHT OUT BY THE ASSESSING OFFICER, THE LOSS HAS NOT BEEN INCURRED ON ANY TRANSFER OF CAPITAL ASSET ; HENCE , THERE IS NO QUESTION OF ANY LONG TERM CAPITAL LOSS ARISING TO BE CARRIED FORWARD . FURTHERMORE, THE WHOL LY OWN SUBSIDIARY OF THE ASSESSEE WAS THE INVESTMENT IN THE CAPITAL FIELD AND HENCE THERE IS NO PROVISION IN INCOME TAX LAW REGARDING THE CARRY FORWARD OF LOSS ES IN CAPITAL FIELD . HENCE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. ITA NOS. 5296 & 5889/MUM/ 2017 M/S. DAGA GLOBAL CHEMICALS P. LTD 23 27. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE AND THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND MAY , 2018 . SD/ - SD/ - ( AMARJIT SINGH ) ( SHAMIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 2 ND MAY , 2018 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) - 20 , MUMBAI 4. THE CIT - 12 , MUMBAI 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI