TMI Blog2012 (6) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extracts of the Volker Committee report itself, it was absolutely necessary for the assessee to make the impugned payments and, in any event, the commercial expediency of these payments has not even been called into question by the Assessing Officer. The case of the revenue is confined to invoking the Explanation to Section 37(1). - Decided in favor of assessee. - I.T.A. No.: 1402/ Kol. / 2011 - - - Dated:- 31-5-2012 - Shri Pramod Kumar, Shri Mahavir Singh, JJ. Niraj Kumar, for the appellant Pawan Kumar Agarwal, for the respondent ORDER Per Pramod Kumar: 1. By way of this appeal, the appellant Assessing Officer has challenged correctness of learned Commissioner (Appeals) s order dated 19th August 2011, in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 ( hereinafter referred to as the Act ), on the following ground: 1. That on the facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A). Learned CIT(A), after extensively reproducing from the statement of facts and written submissions of the assessee, referred to this Tribunal s decision in the case of TIL Ltd Vs ACIT (16 SOT 33) and observed that the Tribunal had dealt with the identical situation wherein the assessee exported Forklift Trucks to Iraq and export commission was disallowed by the AO on similar grounds and the disallowance was deleted by the Tribunal by holding that the commission paid on account of services duly rendered by the commission agent was allowable as a deduction in computation of appellant s (assessee s) total income . Learned CIT(A) then proceeded to delete the impugned disallowance and observed as follows: It is observed that the commission on export activity had been fully disclosed in all correspondences and activities in relation to export, the commission was paid through the banking channels of RBI approval and it was paid pursuant to an agreement approved by the Government of India and UN. The payment of commission was for business consideration and there was apparently no illegality in making payment of commission. Besides this, nothing has been brought on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rapidly met." (S/22366, para. 37). Throughout 1991, with growing concern over the humanitarian situation in the country, the United Nations proposed measures to enable Iraq to sell limited quantities of oil to meet its people's needs. The Government of Iraq declined these offers, contained in particular, in resolutions 706 (1991) and 712 (1991), adopted, respectively, in August and September 1991. Resolution 986: On 14 April 1995, acting under Chapter VII of the United Nations Charter, the Security Council adopted resolution 986, establishing the "oil-for-food" programme, providing Iraq with another opportunity to sell oil to finance the purchase of humanitarian goods, and various mandated United Nations activities concerning Iraq. The programme, as established by the Security Council, is intended to be a "temporary measure to provide for the humanitarian needs of the Iraqi people, until the fulfillment by Iraq of the relevant Security Council resolutions, including notably resolution 687 (1991) of 3 April 1991". Agreement: Although established in April 1995, the implementation of the programme started only in December 1996, after the signing of the Memorandum of Understanding (M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tarian Coordinator in Iraq reports directly to the Executive Director of OIP, and is responsible for the management and implementation of the programme in the field. Implementation: There are nine United Nations agencies and organizations involved in the programme. They are: FAO, UNESCO, WHO, ITU, UNICEF, UNDP, WFP, UNOPS, UN-Habitat. Delivery: As of 28 May 2003, some $28 billion worth of humanitarian supplies and equipment had been delivered to Iraq under the Oil-for-Food Programme, including $1.6 billion worth of oil industry spare parts and equipment. An additional $10 billion worth of supplies were in the production and delivery pipeline. Performance: The latest report of the Secretary-General on the Oil-for-Food Programme was issued on 12 November 2002 (S/2002/1239) . It focuses on improvements, shortcomings and difficulties in the humanitarian situation in Iraq; a revenue shortfall in the programme; and an assessment of the implementation of the new set of procedures for the processing and review of contracts for humanitarian supplies. The new procedures were introduced under Security Council resolution 1409 (2002), based on the Goods Review List (GRL). It is the first such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on Iraq on 22 May with the adoption of resolution 1483 (2003). The resolution also gave the Secretary-General authority to appoint a Special Representative to work with the occupying forces in rebuilding Iraq; opened the way for the resumption of oil exports, with revenues deposited in a Development Fund for Iraq held by the Central Bank; and provided for the termination of the Oil-for-Food Programme within six months, transferring responsibility for the administration of any remaining Programme activities to the Authority representing the occupying powers. The Council has called on the United Nations to assist the Iraqi people, in coordination with the Authority , in a wide range of areas, including humanitarian relief, reconstruction, infrastructure rehabilitation, legal and judicial reforms, human rights and the return of refugees, and also to assist with civilian police. In its phasedown prior to closure on 21 November 2003, the Office of the Iraq Programme, in coordination with UN agencies and programmes, the Coalition Provisional Authority (CPA) and Iraqi authorities, has continued to identify and ship approved and funded priority items in a pipeline of humanitarian go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in any illicit or corrupt activities in the carrying out of their respective roles in relation to the Programme, including, for example, bribery in relation to oil sales, abuses in regard to surcharges on oil sales and illicit payments in regard to purchases of humanitarian goods; (c) to determine whether the accounts of the Programme were in order and were maintained in accordance with the relevant Financial Regulations and Rules of the United Nations (www.iic-offp.org/reference.htm) 7. There were many significant and controversial findings in this report. One very important aspect of this report was about non-contractual beneficiaries of oil allocation by Iraqi regime, and these allocations or quotas granted by the Iraqi regime were perceived as de facto bribe payments by the Iraq regime. That aspect, however, does not touch the issue in appeal before us. There were also findings to the effect that Iraqi regime used several front companies, which entered into agreements with the exporters and collected amounts for after sales service , inland transportation fees , commission etc, and the amounts so collected by these front companies were passed on as kickbacks to Ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government of Iraq. As noted in Section II.B above, Alia violated and assisted in violating the United Nations sanctions regime, which prohibited any third party from engaging in financial transactions with the Government of Iraq except as permitted under the Programme or Security Council resolutions. By arranging for suppliers to make illicit payments to a Jordanian company such as Alia instead of directly to ISCWT or another governmental entity of Iraq the Iraqi regime disguised the illicit nature of such payments. 498 In fact, all transportation services for which Alia received payment from humanitarian suppliers were provided by employees of the Government of Iraq. Transport of goods arriving at Umm Qasr was provided by trucks from the Ministry of Transportation or the Iraqi Grain Board ( IGB ). When asked how much of the fees paid by Alia to ISCWT were used for the true costs of transport, Alia s general manager stated: There were no actual costs. The driver got maybe $10. This was a payment to the Government of Iraq. Alia s general manager was unaware whether the actual costs for transport had any bearing on the transportation fee charged and collected by Alia. Followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Programme, Alia contracted to supply Toyota vehicles and spare parts. For these two contracts, Alia paid a total of $1,246,072 in after-sales-service fees (in cash and in kind) and $90,900 in inland transportation fees, totaling $1,336,972. With respect to one of these contracts, COMM no. 800929, Alia disputed the characterization of its payment as an after-sales-service fee, referring to the payment merely as an extra fee. Additionally, Alia advised that it inflated the price of this contract by more than $4,000 per vehicle at the Government of Iraq s request and then used the extra revenue to purchase fifty more vehicles that it shipped without inspection to Iraq. 503 In summary, based on the available evidence, Alia knowingly acted as a front company, serving as a conduit for collecting hundreds of millions of dollars in illicit fees paid by suppliers to the Iraqi regime. Alia further made illicit payments totaling $1,336,972 in connection with its own contracts under the Programme. 8. There is thus reasonable material, by way of Volker Committee report, to indicate that no services were actually rendered by Alia which actually worked as a conduit for Iraqi regime o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is concerned, what is really important is the purpose for which the assessee has made the payment. The purpose for which the assessee has made the payment is evident from the appointment letter of agent, a copy of which is placed at page 132 of the paper-book, which sets out the Alia s obligations as follows: 17th July 2001 Alia Transportation and General Trading Co Iraq Sir, This is in response to enquiry floated for supply of tea to Iraq under Oil for food program . Please find mentioned herein the services to be rendered by you against payment of after sales service/commission to be decided mutually: a) make enquiries in the Ministry of Trade, State Company for foodstuff trading, Baghdad, Iraq, as to their requirement of the black tea; b) collect copy of the tender, as and when floated by the said Ministry, and send the same to us to submit the tender documents to the concerned authorities in the Ministry on our behalf; c) negotiate the tender prices with Ministry officials, and obtain clearances regarding the prices, terms and conditions etc, in consultation with us; d) follow up with the Ministry opening of letters of credit (L/Cs) after registration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regime, which prohibited any third party from engaging in financial transactions with the Government of Iraq except as permitted under the Programme or Security Council resolutions. By arranging for suppliers to make illicit payments to a Jordanian company such as Alia instead of directly to ISCWT or another governmental entity of Iraq the Iraqi regime disguised the illicit nature of such payments but then that aspect of the matter is not really material for us. In order to invoke Explanation to Section 37(1), it is necessary that the assessee s payment should be for a purpose which is an offence or which is prohibited by law. What the recipient of this payment does is hardly important from this perspective. The illegality has supervened at the stage at which the Alia has paid the money to Iraqi regime in violation of UN sanctions against Iraq, but that that is the stage at which assessee has no control over the matter. It is not even a finding by the Volker Committee that the exporters making payments for the inland transportation fees or after sales service always knew that the monies will be used for the purposes of kickbacks to the Iraqi regime. As a matter of fact, these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors to make such payments directly to Iraqi-controlled bank accounts or to front companies outside Iraq that in turn forwarded the payments to the Government of Iraq. Not only were these side payments unauthorized, but it was an easy matter for Iraq to impose inland transportation fees that far exceeded its actual transportation costs. By mid-2000, Iraq instituted a broader policy to impose generally a ten percent kickback requirement on all humanitarian contractors including contractors shipping goods by land as well as contractors shipping to Umm Qasr. This broader policy was in addition to the requirement that contractors pay inland transportation fees. Iraq dubbed its more general kickback requirement as an after-sales-service fee. After-sales-service provisions often were incorporated into contracts as a way to inflate prices and permit contractors to recover from the United Nations escrow account amounts they had paid secretly to Iraq in the form of kickbacks. Contractors paid these kickbacks before their goods were permitted to enter Iraq. For ease of reference, this form of kickback is referred to throughout as an after-sales-service fee even though Iraq often colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1). The most significant aspect of the matter is the purpose for which the assessee has made the payment. No doubt, when the payment is made for the purposes of illegal kickbacks, these payments invite disqualification under Explanation to Section 37(1), but when the assessee makes the payments for bonafide business purposes and such payments end up being used as illegal kickbacks, in our considered view, Explanation to Section 37(1) will not be attracted. As far as the cases in category (a) are concerned, i.e. in a situation in which the assessee is a willing party to the illegal kickbacks, the onus is on the Assessing Officer to demonstrate so because an assessee cannot be asked to prove a negative i.e. that he is not a willing party to the illegal kickbacks. There must be some material to indicate that the assessee was aware that the payments by the assessee were to be used as kickbacks; a mere suspicion to that effect cannot suffice. 12. It is also important to bear in mind that the fact that the services were indeed rendered to the assessee. The fact that services were actually rendered to the exporters supplying goods under Oil for Food Program, in consideration for thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commission agent to whom commission payment was made, and the charges for these services were quite disproportionately high vis- -vis the local costs. 14. None of the above reasons, even if be valid and correct, affect the deductibility of commission payments in the hands of the assessee. 15. The assessee has made payment for commission and has been rendered services in consideration of the same. As a matter of fact, it is not even revenue s case that no services have been rendered at all. The fact that services have been rendered by a party other than the agent to whom commission is paid is wholly immaterial so far as deductibility in the hands of the assessee is concerned. 16. As for the position that the payment was highly excessive vis- -vis the local costs, even if that be so, that aspect of the matter does not affect the deductibility in the hands of the assessee either. The assessee is concerned with commercial expediency of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extracts of the Volker Committee report itself, it was absolutely necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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