By TIOL News Service

NEW DELHI, DEC 10, 2014: THE issues before the Bench are - Whether the sum paid for transfer of contractual obligation to its sister concern, nomenclatured as commission is allowable u/s 37(1) as a normal business expenditure and Whether expenditure incurred for rendering benefit to a particular director of the assessee company can be allowed as a business promotion expenses. And the verdict goes in favour of assessee.

Facts of the case

The assessee is a company engaged in trading of various goods in international markets as well as locally. During the AY 2004-05, it had entered into a contract with Messrs. Swiss Singapore Overeaseas Enterprises Private Limited, UAE for import of 12500 MT of Fuel Oil 180 CST in bulk. As notified by Central Government, acquisition, storage and sale of solvents without licence was prohibited by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000.

Assessee had no license to legally import the furnace oil, when it entered into contractual obligation for import with SSOE. In the result, the assessee requested its sister concern viz., BGH Exim Limited to undertake and perform contractual obligations arising from the said contract between the assessee and SSOE for the payment of consideration, as also for the sum described as commission. Assessee claimed an amount of Rs. 28 ,37,500 /- as commission paid to its sister concern M/s. BGH Exim Limited.

During assessment, AO had noted that assessee had purchased such furnace oil from its sister concern and it did not believe that the commission was paid for transfer of contractual liability for importing the furnace oil from Singapore based company. Thus, claim of commission was held to be bogus and was disallowed. AO had also disallowed promotional expenditure incurred by the assessee for sending mangoes to one of its supplier companies at Singapore.

On appeal, CIT(A) had allowed both the appeals of assessee.

On further appeal by Revenue, Tribunal had reversed the order of CIT(A). It had noted that an application was made to the District Magistrate seeking licence for acquisition, sale, storage of furnace oil, which was not granted. It further noted that though the assessee had no licence , it entered into a contract with an overseas company for fulfilling contractual obligation which was prohibited by law. The subsequent action of making payment of commission to the sister company was also contractually referable to a purpose prohibited by law, and therefore, for acquisition of solvent without licence ; if any amount was to be paid, explanation to Section 37 (1) would not allow sustaining of claim of commission. The Tribunal also disallowed expenditure of claim by the assessee for sending mangoes to one Narayan V. Thosar through Air Wings.

Facts of the case regarding providing benefit to a particular director

It pertains to deduction of expenditure amounting Rs. 1,65,172/- for sending mangoes to one Narayan V. Thosar through Air Wings. According to the assessee, this expenditure was incurred for business promotion, to maintain good business relations with the supplier company and its associate enterprises. On appeal, CIT(A) allowed the claim on the ground that it was an expenditure incurred for sending mangoes to its supplier to maintain good business relation. On further appeal, Tribunal disallowed the same on the ground that there was no material on record to show as to how such a large quantity of mangoes could be consumed on one day or over few days and what business purpose was to be achieved by giving such large quantity of mangoes to one Mr. Narayan Thosar. In absence of any material on record to establish business expediency for sending the mangoes to one particular person, this ground was disallowed.

The Supreme Court dismissed the Special Leave Petition filed by the Assessee against the order of High Court, wherein the High Court held that,

Regarding Transfer of Contractual obligation

++ both the Tribunal and the Assessing Officer were justified in not allowing the amount of commission. The said amount of commission is essentially paid for transfer of contractual obligation. The assessee on having realized that any import in absence of a valid licence , would attract criminal/penal proceedings, approached its sister concern M/s. BGM Exim Limited. On consent having been obtained from the sister concern, it approached SSOE and insisted to transfer the contract of import of 12500 MT of furnace oil in the name of its sister concern on the ground that there was some problem of discharge of cargo in the name of the assessee. After much persuasion, SSOE agreed and allowed such contractual obligation to be transferred to its sister concern, of course; subject to assessee undertaking the responsibility of payment and materials. Commercial invoice was already prepared in the name of sister concern - M/s. BGM Exim Limited. It could also be noticed that subsequently from M/s. BGH Exim Limited purchases were made by the assessee of the very product and it also sold a portion of such quantity to IFFCO. Under such circumstances, Tribunal chose not to allow the amount of commission u/s 37;

+ even assuming that the sister concern since had a licence for importing the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, nothing comes on the record to explain as to how the sum termed as "commission" for performing the contract obligation was needed to be paid to the sister concern. It also emerges from record that not only the assessee got the contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale to IFFCO appear to be in complete breach of the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 which explicitly prohibits any of these acts without a valid licence;

+ even the nomenclature used as "Commission" is not taken into consideration and the character of payment in substance if it is to be looked at, nowhere it emerges that there was any valid claim for allowing the sum of Rs. 28 lakhs which was a consideration for transfer of contractual obligation. Even if there is no loss to the revenue because the revenue has recovered tax on the said amount from the sister concern, then also, when from the record itself, it writs large that the transaction is in contravention of the Solvent Order, 2000 and the entire modus is also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power requires to be sustained;

Regarding providing benefit to a particular director

+ this Court in case of Sayaji Iron & Engineering Company v. CIT, had permitted expenditure in maintenance of vehicles used by the Directors for personal purposes. The Directors' remuneration includes any expenditure incurred in providing benefit free of charges. The Court reversed the decision of the Tribunal on the ground that the Directors of the assessee company, who are entitled to use the vehicles for their personal use in accordance with the terms and conditions on which they were appointed and the perquisites given to the directors formed part of their remuneration under the Explanation to section 198 of the Companies Act, 1956 for the purpose of determining their remuneration under section 309 of that Act. It further held that once such remuneration was fixed as provided under section 309, it was not possible to state that the assessee incurred the expenditure for the personal use of the Directors. Since it was as per the terms and conditions of service, it must be held as a business expenditure. As no ground comes forth, nor there is any rationale for such huge business promotion expenditure incurred for supplying mangoes to a particular person, this authority will not come to the rescue of the assessee. Both on the ground that this issue essentially being in the realm of facts and secondly, on the smallness of the claim, we do not deem it fit to interfere, as no substantial question of law arises therein.

(See 2014-TIOL-98-SC-IT)