THE issues before the Bench are - Whether the assessing officer
has powers u/s 37(1) to go into that aspect of relationships between the
assessee and auto dealers where the commission paid is to be reduced every year
merely because it was done in the initial years and Whether the fact that the
commission payable was 90% in the first year and reduced to some extent in the
latter years, is a consideration for the AO to conclude that, it necessarily has
to be reduced further in
the succeeding year. And the verdict goes in favour of
the assessee.
Facts of the
case
The assessee is engaged in the
business of corporate insurance agency. It conducts business through extensive
Maruti dealers’ networks consisting of over 300 sales outlets and 400 dealer
workshops spread throughout the country. It was a 100% owned subsidiary of
Maruti Suzuki India Ltd, and had a business arrangement with National Insurance
Co. Ltd as its licensed corporate insurance agent. It had filed a return for AY
2006-07 declaring an income of Rs.2,66,26,206/-. During assessment, AO issued
notice u/s 143 (2) and the assessee filed its reply. The AO held that the
assessee had debited Rs. 8,99,89,136/- as commission paid to Maruti dealers, on
a total sum of Rs. 6,29,92,395/-. This amounted to 70% of the total receipts of
insurance commission. For the preceding years, the payments made to Maruti
dealers were 70%, 79% and 93.66%. The AO restricted the commission to 60% and
thus disallowed Rs.89,98,913/-. On appeal, CIT(A) allowed assessee's
contentions. On further appeal, Tribunal had allowed the appeal on the basi that
the revenue’s argument that commission payable during the initial years, after
setting up of business might have been warranted, whereas for the AY 2006-07 a
decline in such commission could be justified. The matter was remitted for
reconsideration to the AO to decide the matter afresh. The assessee had applied
u/s 254 (2) seeking rectification of the ITAT’s order, which was eventually
allowed on 14.1.2011. The Revenue filed a Writ Petition 2012-TIOL-711-HC-DEL-IT
– which was considered by HC and allowed, where it was held that the conspectus
of circumstances in the case did not warrant the ITAT’s exercise of jurisdiction
for rectification u/s 254 (2). The assessee sought review of that judgment but
without avail.
Before HC, the assessee's counsel
had contended that CIT(A) had examined the entire records including the fact
that for the previous period, i.e., AY 2005-06, the CIT had considered and
noticed that the percentage of commissions shared with dealers had been in the
range of 93.67%, 79% and 70.09%. It was contended that the Tribunal itself
noticed order of 9.10.2009 and upheld the CIT (A)’s factual findings in 2005-06.
Arguing against the Tribunal’s findings (that the disallowance in this case made
by the AO beyond 60% was unjustified), counsel had submitted that the sole
discretion as regards the amount of commission to be given, parted or shared,
(being a commercial decision) lies exclusively within the domain of enterprise,
i.e., the assessee. So long as the AO was satisfied whether the amounts were
actually paid and the expenses incurred were genuine, he cannot question the
reasonableness of the amount, on the basis of the percentage being high or
excessive.
On
the other hand, the Revenue's counsel had urged that apart from the agreement,
which broadly contained the condition with respect to the commission sharing,
there was no material on the record to indicate that assessee had, in fact,
agreed on year to year basis for differing rates of commission. Emphasizing that
since the assessee and its dealers were party to a written agreement, the
business on this condition, argues the Revenue, was significant. Counsel had
also submitted that AO itself possesses the jurisdiction to determine
reasonableness of the extent of commission, in the sense that commercial
expediency u/s 37 (1) was to be read along with power conferred u/s 40A (2),
which requires the factoring of fair market value of similar
deductions/expenses.
Held
that,
++
this Court has considered the submissions. Whether the parties were required to
reduce the rates of commission for each year into writing, in the opinion of the
Court, is not an aspect which could have been gone into by the AO. The way
parties entering into a voluntary commercial transaction spell out their
relationship, is a matter of contract, which except by statutory supervision,
the AO cannot go into, at least under Section 37 (1), given that the exclusive
domain of deciding whether the expenditure is warranted, is that of the
assessee. The decision is entirely a business related one. If the matter is
viewed from this perspective, the fact that the commission was 90% in the first
year and reduced to some extent in the latter years ipso facto is not a
consideration for the AO to have concluded that, it necessarily had to be
reduced to 60% for the fourth year, i.e., 2006-07; no support in terms of the
contract or expressed provision of law or rules has been cited in support of the
AO’s determination in this regard. This Court is also satisfied that TDS
payments were made in respect of the dealership commission parted or shared by
the assessee, as is evident from the records. In view of the above findings,
this Court is of the opinion that the question of law is to be answered in
favour of the assessee and against the Revenue. The appeal is accordingly
allowed
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