Whether when assessee enters into an MoU with non-resident consignment agent to reimburse all such costs that are incurred to complete exports sales, such expenses can be allowed as business expenditure - YES: ITAT

THE issue before the Bench is - Whether when the assessee enters into an MoU with a non-resident consignment agent to reimburse all such costs that are incurred to complete the exports sales, such expenses can be allowed as business expenditure. And the answer goes in favour of the assessee.

Facts of the case

A) The assessee company is engaged in the business of manufacturing, food processing and infotech. During assessment, the AO noticed that assessee had claimed certain expenses as "USA

office expenses". When the AO asked the assessee to justify its claim with supporting evidence, in response, the assessee submitted that M/s Global Reliance Inc. deducted the business expenses amounting to USD 343347/- equivalent to Rs.1,51,07,247/- in the course of export sales of the goods on behalf of the assessee in the relevant year. The assessee also enclosed the certificates from M/s Global Reliance Inc. and a certificate in respect of selling and administrative expenses claimed to have been verified by the CPA in the USA. The AO pointed out that in reality the assessee did not maintain any office in the USA. The AO held that the assessee had no substantive evidence in its possession to show that these claimed expenses had actually been incurred for the purpose of business of the assessee and secondly, that the assessee had made its entire export sale of M/s Global Reliance Inc. and all export invoices had been raised in the name of M/s Global Reliance Inc. Therefore, the so called claimed expenses of the assessee, which had been incurred by the M/s Global Reliance Inc. and claimed by the assessee as its "USA office expenses" were in any case in the nature of post sale expenses and the same could not be said to be expenses pertaining to the export business of the assessee. On appeal, CIT(A) partly allowed the appeal.

The CIT(A) observed that assessee had entered into an agreement with M/s Global Reliance Inc. USA on 30.03.2004 which was effective from 01.04.2004 to 31.03.2005. As per the agreement it was seen that the assessee was to bear all the expenses incurred out of India on account of marketing which would include road freight, ocean freight, custom duty, warehousing charges etc. on actual basis. In addition to above it was also a part of the agreement that the assessee would pay an amount @ 9.05% of the total sales on account of selling and administrative expenses, remuneration and other incidental. It was also agreed that all the above expenses would be deducted by Global Reliance Inc. out of the sale proceeds and the net amount payable would be credited to the account of the assessee. One of the important contentions in the assessee's argument "was that all the payments had been made to Global Reliance Inc under a mutual agreement and since the counter parties to the agreement had not made any misgivings about the genuineness or the reasonableness of the payment, therefore, the AO could not disregard the payment made by virtue of the above agreement. The AO had observed that the agreement was not registered and it was only in the nature of a self serving document between two related parties and therefore, the agreement" was a sham agreement only for the purpose of avoidance of payment of taxes. Assessee also claimed expenses by way of selling and administrative expenses under the USA offices expenses. As per the agreement, the liability of the assessee towards selling and administrative expenses was to an extent of maximum of 9.05% of the sales as fixed by the agreement discussed above. The AO observed that these expenses were being disallowed since the assessee had not submitted any evidence regarding the above expenditure. Perusals of the facts on record showed that the assessee had filed the details of the major expenses incurred under the head selling and administrative expenses. The bills and vouchers regarding the above were also sent to the AO.

Before the Tribunal, the assessee's representative submitted a copy of decision of ITAT Delhi 'C' Bench in assessee's own case for AY 2003-04 dated 14.10.2009 passed in assessee's appeal in ITA No.228/Del/2009 and revenue's appeal for the same assessment year in ITA No. 815/Del/2009 wherein the entire controversy was restored to the file of AO with a direction to examine assessee's claim afresh. The AR had also filed a copy of the order of CIT(A) dated 30.3.2013 for AY 2003-04 by which appeal of the assessee had been allowed by deleting impugned addition in respect of expenses incurred by M/s Global Reliance Incorporated, USA on behalf of the assessee. On the other hand, DR submitted that the CIT(A) erred in law and on facts in deleting the addition of Rs.4,07,92,581 out of total addition of Rs.4,33,78,000 made by the AO on account of ocean freight, custom duty, warehousing expenses, road freight of USA and selling and administrative expenses. The DR further contended that the CIT(A) had erred in deleting above addition being the fact that the evidences submitted by the assessee could not prove that these expenses actually pertain to assessee's business. The DR further contended that the expenses claimed by the assessee were not allowable to the assessee as no TDS had been deducted by the assessee on these payments which as per version of the assessee were contractual payments. The DR also contended that CIT(A) grossly erred and was not justified in accepting the explanation of the assessee that the Central Government department had granted subsidy to the assessee on the basis of these expenses. The DR also pointed out that in the return of income, the assessee had not declared any subsidy as its income and, on the other hand, it has just netted off the expenses which proves that the assessee had no intention to declare the income actually accrued or received by it. The DR finally submitted that AO made disallowance and addition on reasonable and cogent grounds which was wrongly deleted by the CIT(A), therefore, the impugned order may be set aside in this regard by restoring that of the AO.

B) Before the Tribunal, the assessee's representative submitted that when a major part of the expenditure incurred by the assessee has been accepted by CIT(A), then another minor part of the claimed expenditure cannot be disallowed. The AR placed reliance on the judgment of SC in the case of GE India Technology Centre Pvt. Ltd. vs C.I.T. (2010-TII-07-SC-INTL) and judgment of Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. vs DCIT (2009-TII-44-ITAT-MUM-SB-INTL). The AR pointed out that in the case of GE India Technology Centre Pvt. Ltd. the Apex Court had held that mere remittance to non-resident duty to deduct tax at source does not arise unless remittance contains wholly or partly taxable income. In the case of Mahindra & Mahindra Ltd. ITAT Mumbai (SB) interpreting the provisions of section 9(1)(vi) Explanation 2 held that in case of remittance or reimbursement expenses where no element of income taxable of India is found, then the same is not taxable in India and question of tax deduction at source does not arise. It was further submitted that when a major part of expenses had been allowed by CIT(A), then the remaining small amount cannot be disallowed without any basis. The AR submitted that the entire expenses claimed by the assessee were pertaining to "USA, office expenses" which were reimbursed to M/s Global Reliance Inc. and there was no element of income taxable in India. Therefore, the duty to deduct TDS cannot be fastened on the assessee and entire claim of the assessee deserves to be allowed. On the other hand, DR had submitted that if the CIT(A) had allowed major part of the expenses claimed by the assessee considering the same as reimbursement of "USA, office expenses", then remaining part of claim may be disallowed in absence of any details or evidence regarding the expenditure like car expenses, donation, membership fee, newspapers and periodicals and legal and professional fees not related to the sales. The DR pointed out that the onus was on the assessee to prove and establish his claim related to the expenses incurred only and exclusively for the purpose of business u/s 37(1). The DR had vehemently contended that when the assessee was unable to substantiate his claim for a part expenditure and no details or evidence had been filed regarding the same, then such claim deserves to be disallowed and the authorities below rightly disallowed a part of expenses for which the assessee could not discharge his onus to prove.

Held that,

A) ++ it as per terms of the agreement (MOU) dated 19.9.2002 between the assessee and M/s Global Reliance Inc., the expenses in the nature of selling and administrative expenses were clearly the responsibility of the assessee and the assessee had to reimburse the same to its consignment agent i.e. M/s Global Reliance Inc. It is a well accepted proposition that in case of a standard consignment, sale is effected by the consignment agent on behalf of the consignor and the agent is not responsible for any expenses incurred for such sale and expenses actually incurred or paid on behalf of the consigner is reimbursed to the consignment agent. The AR's contention on this point is that apart from actual ocean freight, custom duty paid in USA, warehousing expenses in USA, road freight in USA, selling and administrative Expenses in USA and other incidental expenses and the remuneration of the consignment agent was fixed @9.05% of the sales made in USA by Global Reliance Inc. as per terms of the subsequent agreement dated 30.03.2004 to regulate and monitor the same remain within the budgeted cost allocation which is a prudent business decision of the assessee to control the expenses incurred by consignment agent. The AR also contended that the department should follow the rule of consistency as per decision of SC in the case of Excel Industries;

++ the expenses incurred on behalf of the assessee by its consignment agent M/s Global Reliance Inc, the entire expenses claimed by the assessee were related to marketing and sales expenses and as per clause 03 of the first agreement dated 19.9.2002, the assessee was responsible for all costs, taxes and other tax expenses relating to the import from India to USA and sale of products made by Global Reliance Inc. including custom duty, ocean freight and land freight of USA, warehousing expenses in USA and other general and administrative expenses including USA Salaries payments, Telephone Expenses, Travelling Expenses, Staff Education and Medical Expenses, Courier Expenses, Web Hosting Expenses, USA Local Expenses, Membership Fees paid to different Associations, Legal & Professional Fees, Car Expenses etc. We also observe that as a prudent business decision and with an aim to restrict and control expenses in USA, the assessee also fixed the selling and administrative expenses remuneration and other incidentals @9.05% of the sales effected in USA. Undisputedly, the amount of remittance or reimbursement made to Global Reliance Inc. also contained an element of commission of consignment agent i.e. Global Reliance Inc. but at the same time, we clearly observe that the consignment agent has not rendered any service in India and, therefore, consignment commission is not taxable in India. On very careful perusal of assessment order, impugned order of the Commissioner of Income Tax(A) and entire record and material placed before us, we observe that the authorities below have not disputed the procedure adopted by the assessee and its consignment agent i.e. M/s Global Reliance Inc. that the assessee raises bills/invoices by estimating net realizable value (i.e. gross sales value in US minus US expenses) and under the relevant custom rules an ARE-1 was field by the assessee in respect of all goods leaving Indian custom boundaries and same detail was duly declared in ARE-I by the assessee and total amount for the same was amounting to Rs. 9.65 crores. We also observe that the authorities below have also not disputed rather accepted the accounting method of the assessee that out of the gross sales realized in USA was declared as turnover by the assessee in the final account and US expenses were also claimed separately therein;

++ in view of the above observation made in earlier para, we hold that the Assessing Officer concluded the assessment on contradictory finding because on the one hand, the Assessing Officer has considered gross sales realized value in USA as sales of the assessee for the financial year under consideration and on the other hand the AO held that the export sale was completed when the consigned goods left the Indian Customs Border and all expenses incurred thereafter were post sale expenses. Accordingly, we are inclined to hold that first part of findings of the Assessing Officer are correct that the gross sales realized value in USA is the export sales of the assessee but export sales was not completed when the goods left the Indian Custom Borders because it was consignment which was intended to be sold through consignment agent of the assessee i.e. M/s Global Reliance In. in USA. We further clearly observe that as per above set of facts, all US expenses incurred by the consignment agent on behalf of the assessee were the responsibility of the assessee as per MOU dated 19.9.2002 and subsequent agreement dated 30.3.2004, which were also certified by CPA audit report, when actual export sale was effected at USA through consignment agent on behalf of the assessee, then expenses claimed by the assessee for the purpose of business cannot be treated as post sales expenses and observations and findings of the Assessing Officer are not correct and justified in this regard and we set aside the same to this extent only;

++ on the basis of above factual matrix emerged from the evidence submitted by the assessee before the authorities below, we clearly observe that the ratio of decision of SC in the case of GE India Technology Centre P. Ltd. is applicable to the present case. We also hold that the benefit of the ratio of the decision of Special Bench, Mumbai in the case of Mahindra & Mahindra is also squarely applicable to the present case in favour of the assessee. Hence, in this situation and above facts and circumstances of the case, Circular No. 715 dated 8.8.95 is not applicable to the present case. Coming to the issue of consistency, we clearly observe that the Commissioner of Income Tax(A) has granted relief to the assessee in the AY 2003-04 pertaining to the same claim of the assessee and we are unable to see any valid reason to interfere with the same in the impugned order. Under these circumstances, we are inclined to hold that the department does not have any valid reason to take a different stand on this issue which the Commissioner of Income Tax(A) has taken in favour of the assessee for AY 2003-04. 24. In the result, we hold that the CIT(A) has granted relief for the assessee on reasonable, justified and cogent grounds which were again followed by CIT(A) in assessee's own case for AY 2003-04 vide its order dated 30.03.2013. We are unable to see any ambiguity, perversity or any other valid reason to interfere with the same. Accordingly, all grounds of the Revenue being devoid of merits are dismissed;

B) ++ at the outset, we find it appropriate to consider the ratio of the judgment of SC in the case of GE India Technology Centre, wherein it has been held that mere remittance to non-resident, TDS obligation does not arise unless remittance contains wholly or partly taxable income. In the case in hand, CIT(A) has given benefit to the assessee by accepting the claim of the assessee that a major amount of expenditure reimbursed to M/s Global Reliance Inc. was acceptable and assessee got relief in this regard. ITAT Mumbai Special Bench in the case of Mahindra & Mahindra has held the same legal proposition that reimbursement of expenses where no element of income taxable in India is found, then question of TDS by the payer does not arise. The CIT(A) partly allowed appeal of the assessee granting relief and deleting the addition of Rs.4,07,92,581 but a part of claimed expenditure amounting to Rs.25,85,419 was confirmed and upheld with the observation that no details or evidences have been filed regarding the remaining expenses. In the absence of any details or evidences regarding the expenditure of Rs. 2585419/- the above expenses are being disallowed. Moreover it is also seen that the expenses claimed for which no evidences were filed like car expenses, donations, membership fees, newspaper and periodicals legal and professional fees are also not relating to the sales and therefore, they can not be allowed as business expenditure under the provisions of section 37(1). In view of the findings above the expenditure of Rs. 2585419/- is being disallowed. In the present case, CIT(A) has given benefit to the assessee after detailed examination of the claim of the assessee but a minor part of the claim has been disallowed in absence of any details or evidence regarding the expenditure of Rs.25,85,419 and the same has been disallowed by the CIT(A) partly confirming the addition made by the AO. From the detailed paper book, we are unable to see any cogent or relevant details or evidence which could substantiate or establish the claim of the assessee related to the part disallowance made by the CIT(A). Thus, we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings of CIT(A) pertaining to part disallowance confirmed and upheld by the CIT(A) and we decline to take a different view in this regard. Accordingly, sole remaining ground of the assessee is dismissed by holding that the assessee miserably failed to substantiate its claim of Rs.25,85,419/- with cogent and reliable evidence and the assessee could not discharge its onus in this regard. Therefore, the impugned order is also upheld in regard to confirmation of part disallowance and sole remaining ground of the assessee is dismissed. In the result, the appeals of the Revenue as well as of the assessee are dismissed as discussed above.