Maruti Insurance Distribution Services Ltd v. Commissioner of Income Tax

1. Issue notice. Mr. Sanjeev Sabharwal, Sr. Standing Counsel accepts notice. With consent, the matter was taken up for hearing.

2. The following question of law arises for consideration: - “Did the Tribunal fall into error in upholding the disallowance to the tune of Rs.89,98,913/- made on account of remuneration to dealers.”

3. The brief facts necessary to decide the case are that the assessee is engaged, inter alia, in the business of corporate insurance agency; it 2014:DHC:2953-DB ITA 242-14 Page 2 conducts business through extensive Maruti dealers’ networks consisting of over 300 sales outlets and 400 dealer workshops spread throughout the country. It is a 100% owned subsidiary of Maruti Suzuki India Ltd, and has a business arrangement with National Insurance Co. Ltd as its licensed corporate insurance agent. It filed a return for AY 2006-07 declaring an income of Rs.2,66,26,206/-. The AO issued notice under Section 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, (A) 2005-06, 2004-05 and 2003-04) 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/-. The assessee’s appeal challenging this addition succeeded. The revenue preferred an appeal. The ITAT in its order dated 30-11-2009 (in ITA 2866/Del/09) allowed the appeal, reasoning 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.

4. The assessee had applied under Section 254 (2) seeking rectification of the ITAT’s order dated 30.11.2009, which was eventually allowed on 14.1.2011. The Revenue filed a Writ Petition - W.P.(C) 106/2012 – which was considered by this Court and allowed by judgment and order dated 4.9.2012. This Court was of the ITA 242-14 Page 3 opinion that the conspectus of circumstances in the case did not warrant the ITAT’s exercise of jurisdiction for rectification under Section 254 (2). The assessee sought review of that judgment but without avail. In the circumstances, the assessee appealed to this Court in respect of the main order of the Tribunal dated 30.11.2009.

5. It is contended that the Commissioner (Appeals), in his findings, 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 in the following terms: -

6. Learned counsel for the Revenue urged that apart from the agreement, which broadly contained the condition with respect to the commission sharing, there is no material on the record to indicate that assessee had, in fact, agreed on year to year basis for differing rates of ITA 242-14 Page 5 commission. Emphasizing that since the assessee and its dealers were party to a written agreement, the business on this condition, argues the Revenue, is significant. Learned counsel also submitted that AO itself possesses the jurisdiction to determine reasonableness of the extent of commission, in the sense that commercial expediency under Section 37 (1) is to be read along with power conferred under Section 40A (2), which requires the factoring of fair market value of similar deductions/expenses.

7. This Court has considered the submissions. Whether the parties were required to reduce the rates of commission for each year in to 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. ITA 242-14 Page 6

8. 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.

S. RAVINDRA BHAT (JUDGE) V.KAMESWAR RAO (JUDGE) MAY 30, 2014 /vks/