TMI Blog2016 (10) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has time and again stressed that the payments were made through normal banking channel through authorized foreign exchange dealers and not through the banks which are listed in the VCR. Accordingly, we hold that there is no merit in application of provisions of section 69C of the Act in the present facts of the case and accordingly, we direct the Assessing Officer to delete the addition made on account of unexplained expenditure Disallowance u/s 37(1) - payments as ASSF and ITF were in the nature of kickbacks - HELD THAT:- Assessee claims to have made payments to Al Azhar and KME in assessment year 2002-03 and where the assessee has failed to establish whether any services have been rendered by the said concerns and in view of the documents, evidences referred to by us with regard to these transactions, where admittedly, the amount was paid for service charges, the same are hit by Explanation to section 37(1) of the Act. With regard to Alia, the payments are made against transportation services. The assessee has filed the copies of invoices which are CIF, Baghdad and where it was its duty of assessee to deliver the goods at Baghdad, the remuneration paid to Alia @ 10% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment years 2001-02 and 2002-03 against respective orders passed under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short the Act ). Three appeals filed by Mather Platt Pumps Ltd. are against consolidated order of CIT(A)-V, Pune, dated 26.09.2011 relating to assessment years 2002-03 to 2004-05 against respective orders passed under section 143(3) r.w.s. 147 of the Act. The other two appeals filed by Kirloskar Brothers Ltd. are against separate orders of CIT(A)-I, Pune, both dated 26.02.2010 relating to assessment years 200203 2003-04 against respective orders passed under sections 143(3) r.w.s. 147 and 143(3) r.w.s. 147 263 of the Act. 2. All the appeals filed by related assessee on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience. However, first we proceed to refer to the facts and issues in ITA No.1170/PN/2011 in order to adjudicate the issues. ITA Nos.1170/PN/2011 1171/PN/2011 Assessment Years 2001-02 2002-03 Kirloskar Oil Engines Limited 3. The grounds of appeal raised by the assessee in ITA No.1170/PN/2011 1171/PN/2011 are identical which read as under:- 1. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26.03.2004, under which various additions were made in the hands of assessee and the income was finally assessed under section 115JB of the Act at ₹ 54,15,58,034/-. Thereafter, the Assessing Officer received information which was made available by Volcker Committee Report (hereinafter referred to as VCR) as a result of Independent Enquiry Committee (IEC) appointed by the United Nations Security Council to investigate the administration and management of Oil-for-Food Programme in Iraq. The assessee s name also appeared in the report as supplier party in the list of suppliers who allegedly paid illicit payments of contract for humanitarian goods. Since the assessee had not made disclosure of any such payments in the return of income filed / or during the assessment proceedings under section 143(3) of the Act, the Assessing Officer recorded reasons for reopening the assessment under section 147 of the Act and after taking due approval from the Commissioner of Income, Pune issued notice under section 148 of the Act. The assessee in reply requested that the return of income filed under section 139(1) of the Act on 25.10.2002 be treated as filed in response to notice under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no additional charges were paid for inland transportation at all to anybody. The assessee placed on record the statement showing Bill of Lading number, Invoice number and copies of BL enclosed with Annexure No.1, which clearly stated the place of delivery to be CIF Baghdad. It was further pointed out that the said submissions also held good for Contract No.422/2000 in which the assessee had supplied DM 20 pump sets valuing Rs.₹ 12,40,185/-. With regard to kickbacks in the form of after sales services, the assessee strongly denied the allegation that any kickbacks were paid in the form of After Sales Services Fees (ASSF) to anybody. It also stated that the allegations were without any evidence. The assessee explained that they had appointed Kirloskar Middle East FZE (in short KME ) as a distributor for promoting their exports to Middle East Countries. The copy of agreement was filed before the Assessing Officer. As per the terms of Contract, the assessee was to pay maximum 12.5% of FOB value of the order as commission. The commission was paid in consideration of generation of business for procuring orders from territory assigned, for after sales services and it was also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of Table-8, it would be seen that Genset Diesel Powered / Parts, Water Pumps Driven by diesel engines, there was no mention of any amounts under the columns Paid ASSF and Inland Transportation Fees , whereas in respect of other companies on the same page, specific amounts were mentioned. The assessee in this regard stressed that it shows that they had not paid any ASSF or Inland Transportation Fees on these contracts. The assessee further explained that VCR itself says no specific information was available for Inland Transportation Fees and in any case, these were projected and were not Inland Transportation Fees. It was reiterated that no Inland Transportation Fees of any manner was paid by the assessee either in the past or till the present. The next contention of the assessee was that the said Table referred to ASSF of USD 161056 on water pumps. The assessee alleged that the documents and the basis on which this was arrived at, was not made available and thus, the same could not be rebutted. Further, reference was made to the report which names several banks. In this regard, it was pointed out that the information was not fully confirmed by bank but also it was based on ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the United Nations; and where the committee after necessary enquiries conducted in both examination and investigation had reached the conclusion that illicit payments were required to be made by the suppliers, who were awarded contracts of oil for food programme, the same had evidentiary value. Further, the report also listed the suppliers who were required to make illicit payments. The Assessing Officer noted that the assessee s company name appears in the said list. The Assessing Officer further was of the view that where VCR detailed documents corresponding modus operandi and also analyzing the entire scheme for food for oil, the said report had global ramifications. He also acknowledged that the action was taken in many countries on entities involved in the report on the basis of conclusion of report. Since the findings of report had not been challenged as such, as per the Assessing Officer, VCR had evidentiary value. As per the Assessing Officer, if the report was not factually accurate, it was open for the companies concerned to initiate legal action against UNSC and Mr. Volcker and no action was taken by the assessee company. Since the committee had sent notices to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in the report though opportunity was provided specifically at the time of assessment proceedings. (iii) Therefore, the natural conclusion would be that kick backs have been paid by the assessee company @ 10% of the contract value to the Iraqi government before the goods actually reached Iraq. 11. The CIT(A) upheld the reopening of assessment under section 147 of the Act. The assessee had contended that there was no merit in any addition under section 69C of the Act being unexplained expenditure when the said expenditure was debited to the Profit Loss Account. The assessee further objected to the reliance on VCR and also stated that adequate opportunity was not given. The CIT(A) referred to the VCR, according to which, the suppliers / contractors for oil for food programme in Iraq were found to be indulging in illegal payment of kick backs for the contracts and the assessee s name appeared in the report in Annexure-1, Table 8. Though the assessee denied any payment of kick backs to IG, with reference to the contract for supply of pumps, etc., under the oil for food programme of UN, the CIT(A) noted that as a result of invasion of Kuwait by Iraq, sanctions were im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee that VCR would not fall under any of three sub-clauses of clause (1) of section 74 of Indian Evidence Act. It was stressed that the Volcker Committee could not be termed as Sovereign Authority nor it was an official body or Tribunal. Further, the Members of VCR were not public officers of foreign country and if at all they would be public officers of UN, which enjoyed an existence distinct from its member nations and officers of UN could not be termed as officers of any country as such. Furthermore, it was pointed out that nowhere does the Evidence Act or any principle of Evidence laws indicate that reports available in the public domain are presumed to be true without requiring any proof of the same. Referring to various other sections of Indian Evidence Act, the contention of assessee before the CIT(A) was that even assuming for the sake of arguments that VCR was a public document, the same does not mean that it could be automatically relied on. Accordingly, the Assessing Officer s bald assertion on page 8 of impugned order was claimed to be incorrect. It was stressed by the assessee before the CIT(A) that even the contents of public document are subject to tests of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern KME. It was pointed out that the said concern was appointed as their distributor for facilitating exports to several countries in Middle East and they were working as distributor of the assessee company since 1st April, 1997 and the maximum commission that could be paid to them under the terms of contract was 12.5% of the value of order. The assessee further explained that during the assessment year 2001-02, they had effected sales to various Middle East countries such as Morocco, Oman, Iraq, Egypt, Saudi Arabia, as also Iraq. On all these orders commission had been paid @ 12.5% of the orders value. Similarly, commission @ 12.5% was paid on supplies to IG. It was further pointed out that over and above 12.5%, no extra commission was paid to sales effected to IG. The assessee stressed that the fact of such commission payment was already on record and under such circumstances, no adverse inference could be drawn from the commission paid to KME. The assessee stressed that they had neither debited ASSF to Profit Loss Account under any head of expenditure nor claimed the same as expenditure. The assessee denied the observations in VCR report in toto and also objected to working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer nor CIT(A) had access to VCR and it was not known whether the name of assessee was mentioned in the said report. In that context, the Tribunal had taken a view that the commission payment could not be disallowed on the basis of VCR. The CIT(A) stressed that whereas in the case of assessee, it was not in dispute that the name of assessee does figure in Annexure to the VCR, wherein payment has been made to IG by way of ASSF was clearly mentioned. The second objection of assessee was that copy of report, based on which the impugned additions were made was not made available by the Assessing Officer was addressed by the CIT(A), who was of the view that this contention had no merit, since the said VCR was available in public domain on website. Secondly, where the assessee had made detailed submissions on various aspects of the matter including Table 8, which was Annexure to the main VCR, then it could not be said that the assessee had not read and understood the entire report along with its Annexure. The contention of assessee that the copy of report was not made available by the Assessing Officer was held to be of no consequence. 15. The next objection raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee against reopening of assessment was not pressed and hence, the same is dismissed as not pressed. 18. Vide ground of appeal No.2, the assessee is aggrieved by the order of CIT(A) in upholding the validity of assessment order passed where the same was passed without affording adequate opportunity to the assessee especially without supplying copies of documents listed in VCR, on which reliance was placed by the Assessing Officer and without affording opportunity to rebut the evidence relied upon by the Assessing Officer in spite of specific request made in this behalf. The assessee is aggrieved by the order of CIT(A) in upholding the addition of ₹ 1.47 crores under section 69C of the Act solely relying on the observations of VCR, which is based on surmises and conjecture and guess work. The assessee is further aggrieved by the order of CIT(A) in upholding the addition under section 69C of the Act without appreciating the concept of unexplained expenditure envisaged under section 69C of the Act. The onus of proof of such expenditure actually incurred was on the Department and merely because the name of assessee appeared in the list mentioned in VCR, as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the same, no reliance could be placed on VCR. He further stated that to the best of his knowledge, Government of India has not taken any legal action against any company except the Income Tax Department. He pointed out that all the contracts were approved by UN and in case the same are not approved, then the exports are not possible. Referring to para 11 page 9 and deliberations of CIT(A) from page 19 onwards, the learned Authorized Representative for the assessee pointed out that the addition was made on account of ASSF and no addition on account of Inland Transportation Fees was made. He pointed out that in assessment year 2001-02, the addition was to the extent to ₹ 1.47 crores and in assessment year 2002-03, it was to the extent of ₹ 90,70,637/-, whereas the amount of ASSF written in the document was USD 161056 equaled to ₹ 85 lakhs. 21. On the next date of hearing when the matter continued, the learned Authorized Representative for the assessee opened his arguments with the provisions of section 69C of the Act, under which he pointed out that heavy burden lies on the Department to establish that the assessee had incurred the said expenditure which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Tribunal had expressed doubts and even the Government of India had expressed doubts about its truth. 23. Coming to the provisions of section 69C of the Act, the learned Authorized Representative for the assessee referred to the decision of Mumbai Bench of Tribunal in ACIT Vs. Shahzad Lookman Qadir (2010) 3 ITR (Trib) 177 (Mum) and Hon ble Gujarat High Court in Krishna Textiles Vs. CIT (2009) 310 ITR 227 (Guj) and pointed out that the burden of proof was upon the Revenue to bring on record evidence of payment of kickbacks and where they have failed, then no addition can be made in the hands of assessee. Another aspect of the said addition was the denial of opportunity to cross-examine which was not provided by the Assessing Officer or CIT(A). In this regard, reliance was placed on the ratio laid down by different Benches of Tribunal in Narayan Dass Singhi Vs. ITO (2004) 87 TTJ (Jd) 615, ITO Vs. Suman Saini (2012) 33 CCH 638 and Bhimraj Rajpurohit Vs. ITO (2006) 105 TTJ 899. He submitted that the provisions of section 69C of the Act were not attracted at all. 24. The learned Departmental Representative for the Revenue furnished a flow chart of payment of kickbacks to IG, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2002-03 at page 19 of the appellate order. It was further alleged that final payments were made to the IG through KME or the front companies. Another aspect pointed out by the learned Departmental Representative for the Revenue was that the letters exchanged between the parties i.e. Kirloskar Brothers Ltd. and KME were antedated. The CIT(A) in para 2.3.10 in the appellate order relating to assessment year 2002-03 in the case of Kirloskar Brothers Ltd. has referred to the letter dated 02.01.2002 which refers to Agreement of March, 2001 and April, 2003. 25. Coming to the next aspect i.e. evidence of Inland Transportation, the learned Departmental Representative for the Revenue pointed out that there was no such evidences by sister concern in respect of Inland Transportation fees. It was pointed out that no such evidence has been filed by the sister concern and it has not been established whether sister concern had requisite infrastructure for Inland Transportation and also for providing after sales service. Where the assessee has failed to demonstrate the existence of technical staff, if any, of sister concern, the claim of assessee cannot be admitted. The learned Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of assessee where the assessee claims that it had delivered the goods upto Baghdad, he stressed that the assessee has failed to explain how and to whom the payments were made and further no evidence has been filed in respect of expenses incurred and expended by him. Further, the learned Departmental Representative for the Revenue referred to the claim of assessee before us that ASSF, if any, was paid to KME, a sister concern and not to the IG. Then the learned Departmental Representative for the Revenue placed reliance on the orders of Tribunal in the case of Kirloskar Pneumatic Co. Ltd. in ITA No.425/PN/1995 and in the case of Kirloskar Oil Engine Ltd. in ITA Nos.429/PN/1997 and 606/PN/1999, wherein vide orders dated 24.03.2006 and 23.03.2006 respectively, the Tribunal had disallowed the commission payments. Summing up the learned Departmental Representative for the Revenue pointed out that (a) assessee was not truthful in its claim and (b) the assessee s claim was by way of circumstantial evidence, which was shown to be not correct. He stressed that in the present set of facts what is apparent is not correct. Where KME was assessee s own concern and in the absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the list of companies at page 130 which were operating in different countries and KME was being paid commission @ 12.5% for all the exports by the said concern and also said commission was being paid till today. Where there is no change in the terms and conditions agreed upon between the parties, hence, there is no merit in stating that this is the front end company. He further stressed that how the same could be held to be a colourable device since the same company was operating on behalf of the assessee for 5-7 years on same terms and conditions. Coming to the stand of learned Departmental Representative for the Revenue, it was pointed out that contract for rendering services was not between KME and Iraq but the alleged contract was between the assessee and Iraq. 29. The learned Authorized Representative for the assessee referring to contentions of learned Departmental Representative for the Revenue, in rejoinder, pointed out that in the case of assessee, commission was paid to KME normally after receipt of export receipts. However, VCR in this regard had found that the said commission was paid earlier. 30. Coming to the alleged payment of ASSF, the learned Authorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by saying that the provisions of section 69C of the Act are not attracted. ITA Nos.1524 to 1526/PN/2011 Assessment Years 2002-03 to 2004-05 Mather Platt Pumps Limited 31. The assessee in ITA Nos.1524 to 1526/PN/2011 has raised the following common grounds of appeal :- 1. The learned CIT(A) erred in facts and in law in holding that the reopening of assessment was valid. He failed to appreciate the contentions and arguments advanced by the assessee. 2. The learned CIT(A) erred in facts and in law in upholding the validity of the assessment order without appreciating that the assessment order has been passed without affording adequate opportunity to the assessee especially without supplying copies of the documents listed in the Volker report on which reliance has been placed by the AO and without affording opportunity to the assessee of rebutting the evidence relied upon by the AO in spite of specific request made in this behalf. He ought to have appreciated that the order violates principles of natural justice. 3. The learned CIT(A) erred on facts and in law in upholding additions of ₹ 6,21,44,550/- u/s 69C of the Act made by Assessing Officer by solely re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act agreements and the Assessing Officer noted that it reflected same number and amounts which were directly matching to that of number and amount given in the VCR, hence, the contention of assessee that VCR does not refer to it was found to be not correct. The name of assessee was not in the body of report but it appeared in the list of suppliers making illicit payments to the IG in Table 8 referred to as Committee for Humanitarian Kickback Table in the report . This fact was not denied by the assessee. The next contention raised by the assessee before the Assessing Officer was that in respect of phase 6 and 7 contracts, there was no mention of after sales service fees and inland transportation fees, which in turn, shows that, no after sales services fees and inland transportation fees were alleged to have been paid. It was further contended by the assessee that VCR itself contains that these were projected after sales service fees and not actual after sales service fees. The assessee s argument about non-mention of any amount under the head Inland Transportation Fees and under the head ASSF were considered but since contract executed by the assessee was one of the tainted co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the companies which had paid humanitarian kickbacks to the IG. Further, kickbacks paid by the companies concerned were recovered by incorporating illegal payments as a mark-up in invoices under the head ASSF or ITF . Kickbacks were paid before the goods were permitted to enter Iraq, therefore, the same were paid before that date and in view of very nature of the payments, kickbacks would have been paid outside the books of account. The Assessing Officer further held that as per VCR, kickbacks paid on all humanitarian contracts were 10% of the contract value. Therefore, the same needs to be treated as income of the assessee as unexplained expenditure under section 69C of the Act. The contention of assessee that commission and freight paid by it had been debited to the Profit Loss Account and the transaction did not involve any illegal payment of any kind which requires to be disallowed was found to be unacceptable. The Assessing Officer held that subsequent payment of freight by the assessee and debiting the same to the Profit Loss Account was not material as kickbacks were paid before the goods actually reached Iraq. The actual expenditure incurred by the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is placed at page 1 of Paper Book, under which, in reply to the query raised Is the contract of supply of payments worth as per contract agreement to Republic of Iraq inclusive of Inland Transportation charges and / or After Sales Service charges? . The reply dated 03.12.2009 was yes . The contract of supply of pumps as per contract agreement to Republic of Iraq is inclusive of inland transport charges and / or after sales service charges. In reply to the second query of whether TDS was made on foreign payments, the answer was No as the TDS was not applicable for foreign payments i.e. commission payments under section 195 of the Act. He further referred to the payments made by the assessee filed before the Assessing Officer dated 11.12.2009 placed at pages 2 and 3 of the Paper Book, in which the assessee explained that the contracts which they had entered into were on CIF basis and as such the reply was that the contracts were inclusive of inland transportation charges in response to the query raised by the Assessing Officer. It was further stated and affirmed that the assessee had not paid and not incurred any expenditure of freight and after sales service except for tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im of assessee in the said year was allowability of commission expenses which was disallowed for non-deduction of tax at source by the Assessing Officer. The learned Departmental Representative for the Revenue referred to the tabulated details at page 32 of the Paper Book, wherein the expenses were booked from year to year on account of erection and commissioning totaling ₹ 25.16 crores in three years commission payable @ 12.5% of amount realized totaling ₹ 1.94 crores and foreign exchange paid of ₹ 16.56 crores. The learned Departmental Representative for the Revenue pointed out that the assessee had entered into contract which was inclusive of ITF and ASSF, wherein the payment of commission, etc. was made by the assessee but was shown under the head Erection and commissioning by the supplier. The said payment was made to front concern of IG who were based in Iraq, Jordan and Syria, who in turn, retained 1% and balance was passed on to the IG. The learned Departmental Representative for the Revenue further stated that the Assessing Officer in assessment proceedings was mislead where the assessee said that no expenses were incurred, however, the assessee had boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and issue in assessment year 2002-03 in the case of Kirloskar Oil Engines Ltd. were identical. ITA No.689/PN/2010 : Assessment Year 2002-03 Kirloskar Brothers Limited 40 The assessee in ITA No.689/PN/2010 has raised the following grounds of appeal :- Ground No.1: The learned Commissioner of Income tax (Appeals) erred both in law on facts in holding that reopening of the assessment U/s 147 was proper and in accordance with Law. He ought to have set aside the assessment. Ground No.2: a) The learned Commissioner of Income tax (Appeals) erred in law on facts in upholding the addition of ₹ 89,40,596/- made by the Assessing Officer on the basis of Volcker Commission Report . He failed to appreciate the issue in proper perspective. b) The learned Commissioner of Income tax (Appeals) erred in law on facts in not setting aside the issue on the ground that no proper opportunity to examine and rebut the information on which the addition is based, was given to the Assessee , neither any copy of the papers mentioned in the Volcker Commission Report , nor any opportunity to cross examine concerned person was provided to assessee despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not named in VCR. However, in assessment year 2003-04, payment was made to Alia which was named as front company in VCR. 42. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised by way of ground of appeal No.1 against reopening of assessment under section 147 of the Act was not pressed. He further pointed out that the issue in ground of appeal No.2 was against the addition made on the basis of VCR in both the appeals in assessment years 2002-03 and 2003-04. The learned Authorized Representative for the assessee pointed out that the third issue raised by way of ground of appeal No.3 which was against the claim of deduction under section 80IA of the Act which was covered in favour of assessee by the order of Tribunal. 43. Coming to the facts of the case vis- -vis ground of appeal No.2 i.e. payment made on account of inland transportation fees in assessment year 2002-03 and ASSF in assessment year 2003-04. The assessment proceedings were reopened under section 147 of the Act. The Assessing Officer noted that in assessment year 2002-03, the assessee had paid sum of ₹ 89,40,596/- to Azar Trading Company, Dubai on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given regarding the remittances of foreign funds and the payment to KME and the assessee stressed that the amount of commission paid by it was for services rendered and the same should not be disallowed based on mere findings of VCR. The Assessing Officer vide para 2.3 of the assessment order accepted the fact that the assessee had undertaken exports to IG through distributor KME based in UAE. The Assessing Officer notes that the said company helps the assessee in executing sales order and servicing of its products in Middle East countries. Further, the Assessing Officer observed that it had to be noted that the goods were supplied to IG under the Oil for Food Programme administered by UN as humanitarian measure. The sale proceeds were received by the assessee against LC opened by UN favouring the assessee. The Assessing Officer also acknowledged that it was accepted fact that the assessee did not receive any oil coupons. However, since there was allegation of kickbacks being received by IG by misuse of programme and where UN appointed commission, who in turn, gave VCR which detailed the manipulations of the programme by the then Iraq regime and provided examples of oil buyers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so figured in the list of companies which paid kickbacks to IG. The CIT(A) further observed that under the Oil for Food Programme, all the transactions and payments had to be routed through authorized ESCROW account under the monitoring and control of 661 Committee of the United Nations. But in respect of these illicit payments, which were styled as ASSF and ITF, the payments were made directly to Iraq by several means and outside the programme s authorized ESCROW account. The CIT(A) thereafter, referred to VCR dated 07.09.2005 on the Management of the U.N. Oil for Food Programme which is reproduced at pages 14 and 15 of the appellate order. The flow chart vis -vis illicit payments from the suppliers of humanitarian goods is depicted under para 2.3.6 at page 15 of the appellate order. The CIT(A) thus, observed that the entire modus operandi, as chronicled in VCR clearly showed that kickbacks were paid to IG by way of ITF and ASSF after manipulating the contract amounts for such contracts. Such illicit payments or kickbacks were not authorized under Oil for Food Programme and was in contravention of Resolution of Security Council of UN, which was the authority under the United Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing channels for services rendered by the said parties. The CIT(A) vide para 2.3.10 at page 17 notes that the letter referred to was dated 02.01.2002 wherein the amount was claimed to have been paid for services rendered by Al Azhar Trading Co. However, as per letter dated 14.02.2002 addressed to Bank of India, Pune, the aforesaid amount was paid by way of commission to Al Azhar Trading Co. The CIT(A) in this regard observed that if it were transport services or liaisoning services rendered by Al Azhar, as claimed by the assessee based on the letter of KME dated 02.01.2002, then it could not be a fixed percentage of 12.5% of the contract value, even otherwise, the assessee had failed to furnish any invoices for the alleged transportation services for liaison work. Another feature noted by the CIT(A) was that as per the said letter of KME dated 02.01.2002, the amount was payable as per the agreement of March, 2001 and April, 2003 @ 12.5% of the contract value for the services rendered by Al Azhar Trading Co. and KME. The scanned letter is reproduced at page 18 of the appellate order and the CIT(A) has strongly referred to the said letter which is dated 02.01.2002, but which makes re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments have been made for legitimate business expenses were allowable under section 37 of the Act. This contention of assessee was found to be devoid of merit. Reference was made to Explanation to section 37(1) of the Act by the CIT(A) and Articles of UN Charter and it was mentioned that where sanctions are imposed, then these are binding on UN Members States and non-compliance with the Resolutions and decisions of Security Council constitute the violation of UN Charter and international law. The CIT(A) further observed that in the present case, Resolution 661 prohibited almost all direct financial transactions with the Government of Iraq, particularly para 4 of Resolution 661 barred such financial transactions and where the payments involved were made for purpose which was not permitted under the UN Resolution or which was prohibited under the UN Charter and International Law, were covered within ambit of Explanation to section 37(1) of the Act. Reference was made to the ratio laid down by the Hon ble Supreme Court in the case of Maddi Venkataraman Co. (P) Ltd. reported in 229 ITR 534 (SC), wherein it was held that the payments tainted with illegality could not be claimed as dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the report. The CIT(A) in this regard referred to the principles of natural justice and pointed out that the right to crossexamination was part of procedural justice and was governed by rules of evidence and was creation of court. In the present case, where the assessee was given an opportunity of raising objections against the findings of VCR, then the interest of equity and natural justice was served. The CIT(A) thus, observed that nothing turns on the omission of Assessing Officer to summon the members of VCR and to present them before the assessee for cross-examination. The CIT(A) again reiterated that even keeping aside the VCR for a while, it was not in dispute that certain payments were made to Al Azhar Trading Co. during the year and debited in the accounts of company and has pointed out that earlier it was not known what services were rendered by the said Dubai entity and KME and where the assessee also failed to substantiate its claim that the expenditure was incurred towards services rendered by the agents, the said expenditure was held to be not allowable. Reference was made to the order of Tribunal in the case of Kirloskar Pneumatic Co. Ltd. (supra), wherein similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2003-04, wherein sum of ₹ 1.57 crores was paid to Alia, Jordan on various dates in November and December, 2002 by way of remittances from Bank of India, Pune towards alleged ASSF charges. The contention of assessee that the assessee s name did not figure in body of VCR and further amounts were paid to alleged business expenditure was rejected by the CIT(A). He further referred to Annexure i.e. page 251 of report, where the name of assessee was clearly mentioned in tables 7 and 8 of the report. The contract amount and specific amounts paid or required to be paid by way of inland transportation fees or ASSF were clearly stated in the table to the report and therefore the CIT(A) held that there was no merit in the contention of assessee that its name appears only in the table and not in the main report being of no relevance. From the details filed by the assessee, the CIT(A) observed that the same also indicated that the amount was actually paid towards alleged ASSF to a company in Jordan and though the amounts were debited under the head Brokerage and Remuneration in the Profit Loss Account, reference was made to one of the payments advice notes issued to Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n note of by the CIT(A) and in the absence of any evidence furnished to prove that the said company had rendered services to the assessee and merely because the payment was made through its distributor and through normal banking channels, the CIT(A) held that the payments in question were not justified, which otherwise were also illegal and not as per the mandate of Resolution of UNSC. 51. The CIT(A) further noted that there was no merit in the contention of assessee that consequent to the agreement between the assessee and KME, sales of assessee in those countries had increased substantially. Firstly, the payment was made to Jordan company and not to KME; secondly, there was no increase in sales with Iraq as per details furnished by the assessee; thirdly, as per copies of first letter of appointment of KME as distributor furnished by the assessee, territory covered does not include Iraq and only in the distributorship agreement dated 03.04.2003 entered into with KME, the name of Iraq was included as one of the territories. The CIT(A) held that just because there was increase in sales with other countries, it could not be said that the payment in question was justified and the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the Paper Book. The learned Authorized Representative for the assessee further stressed that the CIT(A) had enlarged the scope of disallowance against which no opportunity was given to rebut in respect of reliance on the ratio laid down by the Hon ble Supreme Court in the case of Maddi Venkataraman Co. (P) Ltd. (supra). The learned Authorized Representative for the assessee pointed out that there was no merit that the assessee had violated FERA. With regard to the allegation of CIT(A) that the said amount was not allowable as the assessee has failed to deduct TDS, the learned Authorized Representative for the assessee pointed out that the CIT(A) had enlarged the scope of disallowance without confronting the said aspect to the assessee. He further stressed that there was no requirement to deduct TDS in this regard. Our attention was drawn to the CBDT Circular, copy of which is placed on record. He further stated that the CIT(A) had applied ratio laid down in M/s. Sumo International Pvt. Ltd. Vs. DCIT (supra), which was later decision. However, at the relevant point of time, Circular had prevailed. Thereafter, the learned Authorized Representative for the assessee referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, inland transport was through Alia. In the assessment year 2002-03 KME directs payment to Al Azhar Trading Co. and in assessment year 2003-04, it directs payment to Alia. With regard to agreement between the assessee and KME, the learned Departmental Representative for the Revenue stressed that only in the agreement of 2003, the territory of Iraq was mentioned. At page 51, no rate is mentioned and at page 58, commission @ 12% is mentioned. He further referred to the Paper Book filed by the Revenue, wherein at page 5, commission @ 12.5% to be paid to KME is mentioned and at page 12 it works out 25%. He stressed that rate of commission was varying and where the commission to Alia was paid @ 10%, he stressed that where in initial agreement, there was no mention of territory, then it is to be presumed that the said area was involved at a later date. Our attention was drawn to the copy of agreement of April, 2003 which is placed at pages 55 to 58 of Paper Book and also the submissions made by the assessee, copy of which is placed at page 2 of the Paper Book, which reference to Agreement of April, 2003. Whereas the submissions made by the assessee, copy of which is placed at pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative for the Revenue furnished reply to the written submissions and further even rejoinder was filed by the learned Authorized Representative for the assessee during the course of hearing of present appeals. 57. We have heard the rival contentions and perused the written submissions filed by the assessee, reply filed by the Revenue and the rejoinder filed by the assessee along with various Paper Books and case laws referred to by both the learned Authorized Representatives and proceed to decide the issues in the present appeals. 58. First, we shall take up the appeal of assessee in the case of Kirloskar Oil Engines Ltd., where the disallowance was made under section 69C of the Act on account of unexplained expenditure of payment of kickbacks. The facts and arguments of assessee have been elaborately referred to by us in the paras hereinabove. For the sake of brevity, the relevant facts for deciding the present issue raised are that the assessee had made certain supplies to Iraq, for several years. As a result of invasion of Kuwait by Iraq, certain sanctions were imposed on the Iraqi regime. However, because of worsening economic and humanitarian conditions in Iraq, UNSC had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 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 (MOU) between the United Nations and the Government of Iraq on 20 May 1996 (S/1996/356). The first Iraqi oil under the Oil-for-Food Programme was exported in December 1996 and the first shipments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation: 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 assessment since the adoption of that resolution. Oil-for-Food Plus: The Programme, as outlined in the latest report of the SecretaryGeneral, was expanded by the Securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 goods and supplies valued at some $10 billion. As of 4 November 2003, consultations between the Coalition Provisional Authority, Iraqi experts and the Unite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 Iraqi regime. This is the area which concerns the issue in this appeal before us, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. Following the conclusion of contract negotiations between an Iraqi purchasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 60. The case of Revenue in the case of DCIT Vs. Rajrani Exports Pvt. Ltd. (supra) was that since reasonable material by way of VCR, which indicated that no services were actually rendered by Alia, which in turn acted as conduit for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited 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 but then that aspect of the matter is not really material for us. 62. Further, regarding applicability of Explanation to section 37(1) of the Act, the Tribunal further in para 10 held as under:- 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 tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sr. Rather than seeking approval from the United Nations for compensation of such costs from the Programme s escrow account, Iraq simply required humanitarian contractors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckback to Iraqi regime, which is prohibited by UN sanctions, could indeed be viewed as prohibited by law, would not render all payments towards after sales service and inland transportation fees as hit by Explanation to Section 37(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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied by us) 13. It would thus seem that, even as per Volker Committee report, the services were indeed rendered for the commission payments paid by the exporters under the OFFP, but the services were rendered by the Iraqi regime itself, rather than the 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. 64. The Tribunal also considered another objection of the Revenue that the payments made in this regard were excessive vis- -vis cost of transaction and the Tribunal further held as under:- 16. As for the position that the payment was highly exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of engaging any other party for this purpose. For undertaking after sales service, the assessee pointed out that it had entered into contract with its sister concern KME, under which KME was appointed as the distributor for different countries of Middle East for sale of Kirloskar Diesel Engines, Kirloskar Diesel Pump Sets, generator sets, spare parts and auto components. Further, the assessee has also filed tabulated details at pages 130 to 132 of Paper Book, wherein the details of agency commission paid to KME on export business including the country to which the goods have been exported is provided. The commission to KME was being paid @ 12.5% on all exports to various countries including Iraq. 67. Taking into consideration the totality of facts, where the assessee had appointed an agent vide Agreement which was executed on 01.04.1997, under which it was expressly agreed between the parties that the said sister concern would be distributor of various Kirloskar Diesel Engines, Pump sets, spare parts and auto components manufactured by the assessee and the territory to be covered for the said transaction were various countries of Middle East including Iraq. As per the terms of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not related to the contracts during the relevant year. In such scenario, where the assessee had an understanding with its agent KME to act as distributor and obtain the orders of products from overseas customers in the Middle East countries and to collect payments and also to provide after sales services for the said products, against which there was an understanding to pay commission to the maximum extent of 12.5% of FOB value of the order, which was to be released after the sales proceeds were received by the assessee. It cannot be held in the present facts and circumstances of the case that any additional amount had been paid to the IG by the assessee on account of ASSF. No evidence has been found against the assessee in the form of any payment to front companies i.e. Alia, etc., except for mentioning of figure in Table 8 of Annexure to the VCR, which does not relate to the value of exports undertaken by the assessee during the year. In any case, the heading of Table 8 is actual and projected illicit payments on contract which establishes the case of assessee that complete details were not available before the VCR and to come to finding of payment of kickbacks and in the absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 37(1) of the Act may hit the deductibility of the impugned payments of persons in category (a), but so far as category (b) and (c) were concerned, Explanation to section 37(1) of the Act could not come into play. The onus is upon the Assessing Officer to establish that the persons making the payments were aware that the said payments were being made in the nature of kickbacks. In the absence of onus being not discharged, the payments are not hit by Explanation to section 37(1) of the Act. 69. In any transaction, the purpose for which the payment is being made has to be seen and where the person is making such payments for the purpose of illegal kickbacks, then the same are to be disallowed under Explanation to section 37(1) of the Act but where the person makes the payments for bonafide business purposes and such payments end up being used as illegal kickbacks, then they do not fall in the category of Explanation to section 37(1) of the Act. Such is the proposition which was laid down by the Kolkata Bench of Tribunal which has been upheld by the Hon ble Calcutta High Court in DCIT Vs. Rajrani Exports Pvt. Ltd. (supra). Applying the said principles to the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of findings of Bofors report. However, the facts of the present case are slightly at variance, where the veracity of VCR was put to test by appointment of Pathak Committee, where the Government of India had not accepted the said report in its entirety. Merely because the name of assessee was appearing in the said report, cannot be the basis for presumption that the assessee must have incurred expenditure on account of kickbacks for providing after sales service which was to be disallowed under section 69C of the Act. It may be clarified herein itself that the findings of VCR were based on certain estimations which were applied in block to all the countries and as pointed out by us in the paras hereinabove, the amount written against the name of assessee does not match with the principle applied by VCR of payment @ 10% of the contract value on account of kickbacks. The assessee had made exports of higher value than the alleged amount of commission written against the name of assessee. 72. The learned Departmental Representative for the Revenue had stressed that the onus was upon the assessee to establish that it had not paid any additional charges for inland transportation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r deciding the issue raised in the present appeal. The plea of learned Departmental Representative for the Revenue thus, is misplaced that the facts of Kirloskar Brothers Ltd. and the assessee are almost identical. The learned Departmental Representative for the Revenue also placed reliance on the ratio laid down by Mumbai Bench of Tribunal in M/s. Cipla Ltd. Vs. ACIT (supra), wherein it was held that it cannot be said that the assessee was not aware of the arrangements with the IG of payment of kickbacks in the form of ASSF. First of all, factually, the facts of the present case are at variance and the said principle cannot be applied. Admittedly, in the present case, the assessee had made payments for providing after sales service to its agent @ 12.5%, which was claimed as business expenditure and allowed as such. The Assessing Officer had made addition under section 69C of the Act on presumptions, which we have already dealt with in paras hereinabove. 73. The learned Departmental Representative for the Revenue had placed reliance on the orders of Tribunal in the case of sister concern of assessee and also in the case of assessee, wherein the claim of assessee of commission pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected based on Govt. of Iraq directives other available evidence and historical trends. The basis for and components of the projections are fully described in the notes to table-8. 76. Further, Quantification of Illicit Payments of After Sales Services Fees as per page No.536 of 623 is as under: As described in tables 7 and 8, evidence of an illicit payment of sales service fees is both actual and projected. From Phase VIII onward, a total of 3554 contracts or slightly over half of the contracts had actual data available pertaining to the after sales service fees amounts levied and paid, the latter of which totaled $495 million. After sales service fees levied and paid for remaining 3204 contracts were projected by committee based on historical data trends and Iraqi policy records . 77. The VCR at page 539 of 623 of Vol-I has explained the basis of Tables 7 and 8, which reads as under: Table 7 presents only those suppliers that had contracts for which there is evidence of collection of illicit after sales service fees and / or Inland transportation fees by the former Government of Iraq. For each supplier, the table presents a summary total of only contracts executed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer during the course of assessment proceedings, the findings of said VCR could not be applied against the assessee. Though, we have decided the issue in favour of the assessee in paras hereinabove, but we would also like to meet this objection by the learned Authorized Representative for the assessee, where during the course of assessment proceedings and appellate proceedings before the CIT(A), the assessee had time and again referred to various paras of VCR and also explained the Nitty-grity of the said report, which was freely available in public domain, there is no merit in the plea of assessee in this regard and the same is dismissed. Accordingly, we allow the claim of assessee and delete the addition made under section 69C of the Act at ₹ 1.47 crores. The grounds of appeal No.2 to 4 raised by the assessee are thus, allowed. The ground of appeal No.1 raised by the assessee is against reopening of assessment, which was not pressed and hence, the same is dismissed. The grounds of appeal raised by the assessee are thus, partly allowed. 80. The facts and issue in ITA No.1171 /PN/2011 i.e. in the case of Kirloskar Oil Engines Ltd. itself relating to assessment year 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein for distribution and servicing products stated therein. As per the terms and conditions of the said agreement, the territory to be covered by KME was UAE, Egypt, Oman, Syria, Iran, Jordan and Saudi Arabia. It may be stressed herein only itself that the name of country Iraq is missing here. The products to be covered were pumps, valves and hermetic compressors and spare parts thereof. Beside other terms regarding prices and invoicing, which were also agreed, was that the shipments would be made by the assessee to the distributor / customer as per instructions of KME. The remittances were to be received by KME from the customer and the same had to be remitted to the assessee within 180 days. Another term agreed upon was that pre and after sales services and also warranty administration would be the responsibility of the distributor. The next term of the agreement was that advertising and sales promotion and finally the validity of the agreement was for a period of two years from 01.01.1997 to 31.12.1998 with clause for renewal. The said agreement is placed at pages 51 to 54 of the Paper Book and except for mentioning the validity of the terms of agreement, it does not mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of renewal of distributorship agreement dated 31.03.2001, wherein the tenure of earlier agreement was validated up to 31.03.2003. The copy of which is placed at page 50 of the Paper Book. However, as pointed out, the agreement dated 03.04.2003 does not talk of the renewal but talks of terms and conditions being agreed upon. 85. We shall also before adjudicating the issue refer to the documentation vis- vis the payment of service charges, under which the assessee claims that it had remitted the sum to the persons who were introduced by KME. The assessee in assessment year 2002-03 claims to have paid ASSF charges to Al Azhar Trading Co., Dubai to the tune of ₹ 18,61,920/- and sum of ₹ 1,78,676/- to KME. The assessee claims that the payment to Al Azhar Trading Co. was made at the behest of KME. In this regard, reliance was placed on a letter dated 02.01.2002, under which KME referred to the supplies made to Iraq and the confirmation that the remittance was cleared and GBP 996612 was cleared to the assessee. In the said letter, reference was made to agreement of March, 2001 and April, 2003 and it talks of receipt of an amount of 12.5% as per the agreement which would wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir distributor. In this regard, the assessee has placed on record letter dated 10.11.2002 at page 103 of the Paper Book, wherein reference to order for 750 numbers of pump sets to be supplied to the Ministry of Agriculture, under which dispatch of 462 pumps valued at Euro 1041810 approx. was made to the party. It is further mentioned in the said communication that since the contract with State Company for Agricultural supplies is for delivery of goods in Baghdad, you are requested to transfer an amount of Euro 104,180 towards transportation charges from Umm Qaser to Baghdad to M/s. Alia For Transportation General Trading Company for the transport services rendered by them to reach the goods at the Baghdad. Based on the remittance we will be able to process the case further and to clear the remittance for the supplies through the letter of credit. Vide letter dated 26.11.2006, the assessee requested the Bank of India to pay 10% of invoice value as service charges to Alia. The copy of the said communication is placed at pages 108 and 109 of the Paper Book. Another letter of remittance for payment towards service charges to Alia is dated 12.11.2002 is placed at pages 113 and 114 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03. Once the agreement expired on 31.03.2003, there is no letter of renewal but a fresh agreement entered into between the parties, which is admissible. However, the said agreement does not refer to the earlier agreements and their renewal and the commission is stated to be at 12%. This is the agreement dated 03.04.2003. Whereas KME vide letter dated 02.01.2002 talks of commission @ 12.5% as per the agreement. Another point which has to be kept in mind is that in the first agreement for the period January, 1997 to December, 1998, there is no mention of territory of Iraq. Vide letter dated 31.03.2001, the assessee only states that the original terms and conditions remains same but the validity of agreement stands extended up to 31.03.2003. The years under appeal before us are ending 31.03.2003 and the distributorship agreement in which territory of Iraq is mentioned is executed on 03.04.2003 i.e. after the close of accounting period. The CIT(A) while deciding the appeal in the case of assessee had pointed out to this anomaly. The assessee has not cleared its stand. The CIT(A) / The learned Departmental Representative for the Revenue has time and again pointed out that vide so called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the payment was also made to Alia. However, no evidence was found by the Revenue authorities in the said case to establish that no services were rendered by Alia in the circumstances, where the assessee i.e. Rajrani Exports Pvt. Ltd. had appointed Alia to carry out the transport services and Alia had accepted the terms of the agreement. In the facts of the present case before us, the assessee has not brought on record any such agreement with Alia. The case of assessee before us on the other hand, is that the services are through its distributor KME, who in turn, had asked the assessee to make the payments to Alia. The payment to Alia has been made @ 10%. The assessee claims that it was paying 12.5% to KME, whereas the agreement of April, 2003 commission is to be paid @ 12%. The first agreement does not refer to any commission to be paid and the assessee has not placed on record the necessary evidences in this regard. The agreement of April, 2003 is not applicable to the years under appeal. In the present set of facts and circumstances, where the onus cast upon the Assessing Officer has been discharged by the Revenue authorities to establish that the payments alleged to have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of kickbacks and were thus, willing parties to the illegal gratification and hence, are thus, hit by Explanation to section 37(1) of the Act. Since the assessee has failed to establish its case of KME has given its services in the absence of any distribution agreement, the payment made to KME is disallowed under section 37(1) of the Act. In this regard, we refer to the findings of CIT(A) in assessment years 2002-03 and 2003-04 and do not reproduce the same for the sake of brevity. Another aspect to be kept in mind is that the name of present assessee finds place in Table 7 and 8 of VCR and Table 7 refers actual expenditure and not projected expenditure. The plea of the assessee that the payment has made through normal banking channels does not help the case of assessee in view of discussion made in the paras above regarding the discrepancy in different communications. 88. Before parting, we may refer to the submissions of assessee against the CIT(A), wherein it was pointed out that the CIT(A) had enlarged the scope of disallowance without affording any opportunity of hearing to the assessee. The assessee is aggrieved by the reliance placed upon by the CIT(A) on the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iver the goods to Baghdad as per terms of invoice, which states CIF, Baghdad. We have already considered the plea of assessee in the paras hereinabove and have deleted the addition in the absence of any evidence being brought on record to establish that any such payment had been made by the assessee in Kirloskar Oil Engines Ltd. However, the assessee in the case of Kirloskar Brothers Ltd. has debited the amount to its Profit Loss Account and onus was upon the assessee to establish which has not been discharged and hence, no merit and hence, dismissed. 90. The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by Kirloskar Oil Engines Ltd. i.e. sister concern of the assessee in ITA Nos.1039 1040/PN/2000, relating to assessment years 1995-96 1996-97, order dated 31.08.2006, wherein the commission paid to Indian concern for liaison work was not allowed since the assessee failed to discharge its onus to establish that the said person had rendered any services to the assessee, which necessitated the payment of commission. The assessee in present appeals has also failed to establish that the expenditure was incurred wholly and exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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