Commissioner of Income Tax vs Suzlon Energy Ltd.

Akil Kureshi, J.—The Revenue is in appeal against the judgment of the income tax Appellate Tribunal, Ahmedabad ("the Tribunal" for short) dated September 21, 2012 (since reported in 2012 (20) ITR (Trib) 391 , raising the following questions for our consideration :

(1) Whether the Appellate Tribunal is right in law and on facts in confirming the deletion of disallowance of Rs. 9,34,95,200 on account of sales commission expenses u/s 37 of the income tax Act ?

(2) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance u/s 14A of the income tax Act in respect of interest expenses incurred for investments in subsidiaries and administrative expenses such as staff salary of corporate office, audit fees, building rent and communication expenses ?

(3) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of deduction u/s 80-IB of the income tax Act in respect of interest income on late recovery of sale proceeds from the debtors ?

(4) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of deduction u/s 80-IB of the income tax Act in respect of duty drawback income of Rs. 2,66,698 ?

We may take up the questions separately for consideration.

1.1 Question (1) pertains to an amount of Rs. 9.34 crores (rounded off) paid by the assessee towards sales commission. The Assessing Officer, however, made an addition of the said amount primarily on the ground that the assessee failed to establish the actual services rendered by the commission agents. He was of the opinion that the question was whether the amount claimed as expenditure was laid down wholly and exclusively for the purpose of business and the mere existence of the agreements between the assessee and its sales agents or payment of the amount as commission would not establish that such payment was made exclusively and wholly for the purpose of enhancing the assessee''s business.

1.2 The assessee carried the matter in appeal. The Commissioner of income tax (Appeals) deleted the disallowances on the ground that the assessee had entered into agreements for payment of commission in respect of the work done by the agents. The payments were made as per the agreements. The Commissioner of income tax (Appeals) also noted various services that the commission agents had to provide as per the agreements. He further noted that all the payments were made through cheques and the parties were genuine. Such commission agents had in turn confirmed the receipt of the payments and also of having rendered services. Such commission received were shown in their tax returns and taxes were also paid. The commission agents were individual persons and no where related to the assessee-company. He also opined that there was considerable increase in the sales of the company and that, therefore, the payment of commission was justified.

1.3 With respect to six individual parties where the Commissioner of income tax (Appeals) had some material to question the payment of commission, to such an extent, disallowances were confirmed.

1.4 It was this order of the Commissioner of income tax (Appeals), which the Tribunal in the impugned judgment, confirmed. The Tribunal observed as under (page 399 of 20 ITR (Trib)) :

2.6 From the above paragraph of the order of the learned Commissioner of income tax (Appeals), we find that a clear finding is given by the learned Commissioner of income tax (Appeals) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realize and, therefore, the payment of commission is justified except for six parties. In respect of these six parties, it is noted by the learned Commissioner of income tax (Appeals) that the Assessing Officer after inquiry has brought on record in respect of these six customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction u/s 80-IB of the income tax Act, 1961. We also find that in the assessment order, the Assessing Officer has allowed the additional deduction u/s 80-IB in respect of various additions made by him in the assessment and, hence, this contention of the assessee is supported by the facts on record that there is no motive to save taxes by paying com-mission since the units of the assessee are eligible for deduction at 100 per cent. u/s 80-IB. In respect of 6 parties which are not introduced by the commission agent, it was the submission of the learned authorised representative that the agents had furnished other information such as report about reputation, status, financing standing, etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The learned authorised representative was asked to file letters of these agents but the same are not filed by the learned authorised representative and, hence, in the facts of the present case, we feel that the order of the learned Commissioner of income tax (Appeals) on this issue does not call for any interference from our side because part disallowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which disallowance of commission is deleted by the learned Commissioner of income tax (Appeals), he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of the learned Commissioner of income tax (Appeals) could not be controverted by the learned Departmental representative regarding the judgment of the hon''ble apex court on which reliance has been placed by the learned Departmental representative, we find that this judgment is not applicable in the present case because the facts are different. In that case, this finding was recorded by the Tribunal that the selling agency firm and the assessee has no genuine existence and such selling agency was found to be make believe document. The facts, in the present case, are not so. In the present case, a clear finding is given by the learned Commissioner of income tax (Appeals) that services were rendered by the commission agents and this findings of the learned Commissioner of income tax (Appeals) could not be controverted by the learned Departmental representative. Hence, this judgment of the hon''ble apex court does not render any help to the Revenue in the present case. In view of our above discussion, we do not find any reason to interfere in the order of the learned Commissioner of income tax (Appeals) on this issue. Accordingly, ground No. 1 of the Revenue as well as ground No. 1 of the assessee''s appeal is rejected.

1.5 From the above, it could be seen that the entire issue hinges on appreciation of the material on record. The Commissioner (Appeals) as well as the Tribunal concurrently held that there was sufficient evidence on record of the assessee having paid commission to the agents who had rendered service as per the agreements. Such payments were made through cheques and were found to be genuine. Commission agents in no way related to the assessee-company and the payments were duly reflected in their income tax returns.

1.6 Under the circumstances, we have no reason to interfere. This question is, therefore, not entertained.

Question (2) pertains to the disallowances made by the Assessing Officer u/s 14A of the Act in respect of interest expenses incurred for investments made in subsidiaries and administrative expenses. The Commissioner of income tax (Appeals) deleted such disallowances, upon which, the Revenue approached the Tribunal. The Tribunal rejected Revenue''s appeal, making the following observations (page 403 of 20 ITR (Trib) :

3.5 We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. Regarding the grounds raised by the Revenue in respect of disallowance of interest expenditure made by the Assessing Officer u/s 14A and deletion made by learned Commissioner of income tax (Appeals), we find that no interference is called for in the order of the learned Commissioner of income tax (Appeals). We hold so because we find that with regard to the investment of Rs. 5907.18 lakhs in foreign subsidiaries, no disallowance can be made u/s 14A because dividend income from foreign subsidiaries is taxable in India. Regarding the balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many time more than this investment because interest-free funds available with the assessee as on March 31, 2005, as per the balance-sheet as on that date is of Rs. 929.57 crores. There is no finding given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance u/s 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground Nos. 2 and 3 of the Revenue''s appeal are rejected.

2.1 From the above portion, we noticed that the Tribunal has bifurcated the expenditure into two parts, the first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries, it was held that the dividend income from such subsidiaries is taxable in India and that, therefore, section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 crores (rounded off) made in Indian subsidiaries. In this respect, the Tribunal noted that the assessee had to its disposal, own interest-free funds many times over the investment in question. As per the balance-sheet as on March 31, 2005, the assessee had interest-free fund of Rs. 929.57 crores.

2.2 Such being the facts, the Tribunal, in our opinion, committed no error. No question of law, therefore, arises.

Question (3) pertains to disallowances of deduction u/s 80-IB of the Act made by the Assessing Officer in respect of interest income on late recovery of sale proceeds from the debtors. The Tribunal confirmed the view of the Commissioner of income tax (Appeals). The assessee carried the matter in appeal. The Commissioner of income tax (Appeals) ruled in his favour. Upon which, the Revenue carried the issue in appeal before the Tribunal. The Tribunal dismissed the Revenue''s appeal relying on the decision of this court in the case of Nirma Industries Limited Vs. Deputy Commissioner of Income Tax, . The Tribunal held and observed as under (page 405 of 20 ITR (Trib)) :

5.1 The learned Departmental representative supported the assessment order whereas it was submitted by the learned authorised representative that this issue is now covered in favour of the assessee by the judgment of the hon''ble Gujarat High Court rendered in the case of Nirma Industries Limited Vs. Deputy Commissioner of Income Tax, and it was also submitted that SLP preferred by the Department against this judgment was rejected by the hon''ble apex court.

5.2 We have considered the rival submissions and we find that this issue is now squarely covered in favour of the assessee by this judgment of the hon''ble Gujarat High Court and, hence, we decline to interfere in the order of the learned Commissioner of income tax (Appeals) on this issue. Ground No. 4 of the Revenue is rejected.

We are in agreement with the view of the Tribunal that the issue is covered by the decision of this court in the case of Nirma Industries Limited Vs. Deputy Commissioner of Income Tax, . In the said decision, the court has held and observed as under (page 430) :

However, the parties having made elaborate submissions, the matter may be examined from a slightly different angle. When the assessee enters into a contract for sale of its products it could either stipulate (a) that interest at the specified rate would be charged on the unpaid sale price and added to the outstanding till the point of time of realisation, or (b) that in case of delay the payment for sale of products worth Rs. 100 to carry the sale price of Rs. 102 for the first month''s delay, Rs. 104 for the second month''s delay, Rs. 106 for the third month''s delay and so on. If the contention of Revenue is accepted, merely because the assessee has described the additional sale proceeds as interest in case of contract as per illustration (a) above, such payment would not be profits derived from the industrial undertaking, but in the case of illustration (b) above, if the payment is described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum and substance, these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without delay. The purchaser pays higher sale price if it delays payment of sale proceeds. In other words, this is a converse situation to offering of cash discount. Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds. It is not the assessee''s business to lend funds and earn interest. The distinction drawn by the Revenue is artificial in nature and is neither in consonance with law nor commercial practice.

The Tribunal was, therefore, not justified in holding that while computing the deduction u/s 80-I of the Act interest received from the trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking.

The sole surviving question No. 4 pertains to the assessee''s claim for deduction u/s 80-IB of the Act on duty drawback receipts. The Revenue heavily relied on the decision of the apex court in the case of Liberty India Vs. Commissioner of Income Tax, . The Tribunal, however, relied on a subsequent decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Dharam Pal Prem Chand Ltd., to rule in favour of the assessee. The Tribunal was of the opinion that in Liberty India Vs. Commissioner of Income Tax, , the Supreme Court has proceeded on the basis that there was no arithmetical co-relation between the export made and the duty drawback receipt. In the present case, since the Tribunal noticed direct co-relation, formed an opinion that the decision in the case of Liberty India Vs. Commissioner of Income Tax, would not apply.

We have a serious doubt about the correctness of the above noted conclusion. However, the amount involved is quite small, we are, therefore, not considering such a question in the present tax appeal, leaving it open for the Revenue to press such a question in appropriate case. This tax appeal is, therefore, dismissed.