ITAT Deletes Commission Disallowance Under Section 40A(2)(b) for Lack of Comparable Basis:

The assessee was engaged in earning commission as a distributor of Herbalife Nutrition India Private Limited, operating under a multi-level marketing model. The business involved distribution of nutrition and wellness products, along with royalties and bonuses linked to the performance of the distributor’s team. The assessee argued that this business model was different from the sale of Ayurvedic products and therefore a 30% commission benchmark was inappropriate.

During the relevant assessment year, the assessee paid commission of Rs 31,87,156 to M/s Tanzil Nutrition Centre (TNC), a proprietary concern of his wife, Mrs. Riddhi Bhavsar. The assessee stated that TNC was substantially involved in promotion and development of his business and had incurred Rs 20,97,860 towards business promotion and related activities. An agreement, profit and loss account and other details were furnished to support the services rendered and payments made.

The AO invoked Section 40A(2)(b) and considered the commission excessive to the extent it exceeded 30% of the relevant turnover. Accordingly, Rs 18,76,286 was disallowed and added to the assessee’s income. The CIT(A) upheld the disallowance 

The Tribunal noted that since TNC was the proprietary concern of the assessee’s wife, the payment was covered by Section 40A(2)(b). However, the Tribunal clarified that mere applicability of Section 40A(2)(b) does not automatically warrant disallowance. The AO must examine whether the expenditure is excessive or unreasonable having regard to the fair market value of the services, legitimate business needs, or benefit derived by the assessee. At the same time, the Tribunal acknowledged that, because the recipient was a specified person under Section 40A(2)(b), the assessee was required to substantiate the services rendered and the basis for the commission.

The Tribunal held that reasonableness of expenditure under Section 40A(2)(b) must be determined on the basis of the assessee’s own business, the actual services rendered and the surrounding facts and circumstances. Accordingly, the Tribunal deleted the entire disallowance of Rs 18,76,286 made under Section 40A(2)(b) and allowed the assessee’s appeal.