Mather & Platt Pumps Ltd.,, Pune v. Addl. Comm. of Income-tax, Range-9,, Pune

ITA 1524/PUN/2011 | 2002-2003
Pronouncement Date: 21-10-2016 | Result: Partly Allowed

Appeal Details

RSA Number 152424514 RSA 2011
Assessee PAN AAACP3590P
Bench Pune
Appeal Number ITA 1524/PUN/2011
Duration Of Justice 4 year(s) 10 month(s) 22 day(s)
Appellant Mather & Platt Pumps Ltd.,, Pune
Respondent Addl. Comm. of Income-tax, Range-9,, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 21-10-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 21-10-2016
Date Of Final Hearing 20-08-2015
Next Hearing Date 20-08-2015
Assessment Year 2002-2003
Appeal Filed On 29-11-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE . . BEFORE MS. SUSHMA CHOWLA JM AND SHRI R.K. PANDA AM . / ITA NO S . 1 170 & 1 171 /PN/20 1 1 / ASSESSMENT YEAR S : 200 1 - 0 2 & 20 0 2 - 0 3 KIRLOSKAR OIL ENGINES LIMITED LAXMANRAO KIRLOSKAR ROAD KHADKI PUNE 4110 03 . / APPELLANT PAN: AA AC P3590P VS. THE ADDL. COMMISSIONER OF INCOME TAX RANGE 9 PUNE . / RESPONDENT . / ITA NOS.1 524 TO 1526 /PN/201 1 / ASSESSMENT YEARS: 200 2 - 0 3 TO 20 04 - 05 MATHER & PLATT PUMPS LIMITED GREAVES COMPOUND MUMBAI PUNE ROAD PUNE 411019 . / APPELLANT PAN: AABCD3568L VS. THE JT. COMMISSIONER OF INCOME TAX RANGE 9 PUNE . / RESPONDENT ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 2 . / ITA NOS. 689 & 690 /PN/201 0 / ASSESSMENT YEARS: 200 2 - 0 3 & 20 03 - 04 KIRLOSKAR BROTHERS LIMITED YAMU NA SURVEY NO.98/3 TO 7 BANER PUNE 411045 . / APPELLANT PAN: AAACK7300E VS. THE DY. COMMISSIONER OF INCOME TAX CIRCLE 11(1) PUNE . / RESPONDENT CIRCLE 11(1) PUNE . / RESPONDENT / APPELLANT BY : SHRI C.H. NANIWADEKAR / RESPOND ENT BY : S /S HRI S.K. RASTOGI CIT AND RAJESH DAMOR CIT / DATE OF HEARING : 25.07 .201 6 / DATE OF PRONOUNCEMENT: 21 . 1 0 .201 6 / ORDER PER SUSHMA CHOWLA JM: OUT OF THIS BUN CH OF APPEALS TWO APPEAL S FILED BY KIRLOSKAR OIL ENGINES LTD. ARE AGAINST SEPARATE ORDER S OF CIT (A) - V PUNE DATED 30 . 0 6 .201 1 AND 11.07.2011 RELATING TO ASSESSMENT YEAR S 200 1 - 0 2 AND 20 0 2 - 0 3 AGAINST RESPECTIVE ORDER S PASSED UNDER SECTION 1 4 3 (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 . 0 9 .201 1 RELATING TO ASSESSMENT YEAR S 200 2 - 0 3 TO 2004 - 05 AGAINST RESPECTIVE ORDER S PASSED UNDER SE CTION 143(3) R.W.S. 147 OF THE ACT. THE OTHER TWO APPEALS FILED BY KIRLOSKAR BROTHERS LTD. ARE AGAINST SEPARATE ORDER S OF CIT (A) - I PUNE BOTH DATED 26 . 0 2 .201 0 RELATING TO ASSESSMENT YEAR S 200 2 - ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 3 0 3 & 200 3 - 0 4 AGAINST RESPECTIVE ORDER S PASSED UNDER SECTION S 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 REF ER TO THE FACTS AND ISSUES IN ITA NO. 1 170 /PN/201 1 IN ORDER TO ADJUDICATE THE ISSUES. ITA NOS.1170/PN/2011 & 1171/PN/2011 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. 1 170 /PN/2 01 1 & 1171/PN/2011 ARE IDENTICAL WHICH READ AS UNDER : - 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 ASSESSMENT WAS VALID. HE FAILED TO APPRECIATE THE CONTENTIONS AND ARGUMENTS ADVANCED BY THE ASSESSEE . 2. THE LEARNED CIT (A) ERRED IN FACTS AND I N 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 I N TH I S BEHA L F . HE OUGHT TO HAVE APPRECIATED THAT T HE ORDER VIO L ATES PRINCIP L ES OF NATURAL JUSTICE . 3. THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN HOLDING ADDITIONS OF RS . 1 47 58 950 / - U/S 69C OF THE ACT MADE BY ASSESSING OFF I CER BY SOLELY RELYING ON THE OBSERVATIONS IN THE VOLCKER REPORT WHICH REP ORT ITSELF IS BASED ON ON THE OBSERVATIONS IN THE VOLCKER REPORT WHICH REP ORT ITSELF IS BASED ON SURMISES CONJECTURES AND GUESSWORK. 4. THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THE SCHEME AND REQUIREMENTS OF SECTION 69C AND THE CONCEPT OF ' UNEXPLAINED EXPENDITURE ' ENVISAGED UNDER SECTION 69C . HE FAILED TO APPRECIATE THAT THE ONUS OF PROVING SUCH EXPEND I TURE I S ACTUALLY INCURRED IS ON THE DEPARTMENT AND THE MERE FACT THAT THE ASSESSE E S NAME APPEARS IN THE LIST MENT I ONED IN THE VOLCKER REPORT IS NOT SUFFICIENT TO DISCHARGE TH I S BURDEN ESPECIALLY WHEN THE VOLKER R EPORT ITSELF IS BASED ON GUESS WORK. 5. THE ASSESSEE CRAVES LEAVE TO ADD TO ALTER AND TO MODIFY ANY OF THE ABOVE GROUNDS OF APPEAL. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 4 4 . BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE HAD FURNISHED RETURN OF INCOME DECLARING LOSS OF RS. 42 32 24 346/ - ON 31.10.2001. THEREAFTER THE ASSESSEE FILED REVISED RETURN ON 02.05.2002 DECLARING BUSINESS LOSS OF RS.49 85 49 274/ - AND CAPITAL GAINS OF RS. 2 21 00 671/ - . AFTER PROCESSING OF RETURN OF INCOME UNDER SECTION 143(1) OF THE ACT THE CASE OF ASSESS EE WAS PICKED UP FOR SCRUTINY AND VARIOUS NOTICES WERE ISSUED. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF INTERNAL COMBUSTION ENGINES OF 3 HP AND ABOVE GENERATING SETS BIMETAL STRIPS AND BEARINGS ENGINE VALVES CASTINGS AND T RADING IN COMPONENTS OF PRIME MOVERS AND OILS ETC. ORIGINAL ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT VIDE ORDER DATED 26.03.2004 UNDER WHICH VARIOUS ADDITIONS WERE MADE IN THE HANDS OF ASSESSEE AND THE INCOME WAS FINALLY ASSESSED UNDER SE CTION 115JB OF THE ACT AT RS. 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 U NITED NATIONS SECURITY COUNCIL TO INVESTIGATE COMMITTEE (IEC) APPOINTED BY THE U NITED NATIONS SECURITY COUNCIL TO INVESTIGATE THE ADMINISTRATION AND MANAGEMENT OF OIL - FOR - FOOD PROGRAMME IN IRAQ. THE ASSESSEES NAME ALSO APPEARED IN THE REPORT AS SUPPLIER PARTY IN THE LIST OF SUPPLIERS WHO ALLEGEDLY PAID ILLICIT PAYMENTS OF CONTRACT F OR 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 ASSESSMEN T 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 148 OF THE ACT. FURTHER REASONS RECORDED FOR REOPENING THE ASSESSMENT WERE ALSO SUPPLIED TO THE ASSESSEE ON ITS REQUEST VIDE LETTER DATED 21.10.2008 . ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 5 5. THE ASSESSEE SUBMITTED DETAILED EXPLANATION VI DE LETTER DATED 07.12.2008 IN RESPONSE TO THE REASONS RECORDED FOR REOPENING THE ASSESSMENT. THE ASSESSEE NOTED FROM THE REASONS RECORDED FOR ASSESSMENT THAT THE ASSESSMENT WAS REOPENED FOR THE FOLLOWING REASONS: - 1) NAME OF THE KIRLOSKAR OIL ENGINES LIM ITED IS MENTIONED IN VOLCKER COMMISSION REPORT. AS PER VOLCKER COMMITTEES REPORT KOEL HAD PAID KICKBACKS IN THE FORM OF AFTER SALES SERVICE AND OR INLAND TRANSPORTATION CHARGES. 2) KICKBACKS ARE AROUND 10% OF THE CONTRACT VALUE. 3) ON THE BASIS OF THE CONTRACTS ENTERED BY KOEL WITH IRAQI GOVERNMENT CERTAIN AMOUNTS WERE PAID FOR INLAND TRANSPORTATION. 4) CONTRACT VALUE FOR THE AY 2001 - 02 USD 172500 6 . IN REPLY THE ASSESSEE POINTED OUT THAT IT HAD SUPPLIED THE CONTRACTS UNDER OIL FOR FOOD PROGRAMME AN D REFERENCE WAS MADE TO EARLIER SUBMISSIONS DATED 11.09.2006. REFERENCE WAS MADE TO THE CONTRACT NO.255/2000 DT ARTICLE 2 PRICE & ARTICLE 3 FREIGHT WHICH WAS AS FOLLOWS: - THE PRICE OF PUMPS WHICH ARE SUBJECT OF THIS CONTRACT HAVE BEEN FIXED BY TH E SELLER THE PRICE OF PUMPS WHICH ARE SUBJECT OF THIS CONTRACT HAVE BEEN FIXED BY TH E SELLER AND ACCEPTED BY BUYER AS FOLLOWS 1500 WATER PUMPS WITH DIESEL ENGINES TYPE KIRLOSKAR. ACCORDING TO CODE NO.05 - 01 - 00004. PRICE PER EACH UNIT C.I.F. BAGHDAD = 1150 US $ TOTAL C.I.F. BAGHDAD FOR 350 (THREE HUNDRED FIFTY) UNITS US $ = 17 25 000 (US DOLLARS ONE MILLION SEVEN HUNDRED TWENTY FIVE THOUSAND ONLY.) TOTAL VALUE OF THE CONTRACT = 17 25 000 (ONE MILLION SEVEN HUNDRED TWENTY FIVE THOUSAND ONLY . THE SELLER UNDERTAKES TO TRANSPORT THE GENSETS BY SEA FRO M INDIAN PORT TO UMM QASR PORT AND FURTHER BY ROAD UPTO BAGHDAD. 7. THE ASSESSEE FURTHER EXPLAINED THAT IN VIEW OF TERMS OF THE CONTRACT IT S RESPONSIBILITY WAS TO SUPPLY WATER PUMPS AT BAGHDAD AND TO PAY FREIGHT CHARGES FOR TRANSPOR TATION OF GOODS UP TO BAGHDAD. EVEN PRICE AGREED UPON S TATES CIF BAGHDAD AND AS PER TERMS OF CONTRACT ONLY FREIGHT CHARGES WERE PAID. THE INVOICES CLEARLY MENTIONS THE TERMS AGREED UPON AS PER THE CONTRACT . THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 6 ASSESSEE THUS SUBMITTED THAT THERE WAS NO QUESTION OF PAYING ADDITIONAL FREIGHT CHARGES FOR INLA ND TRANSPORTATION OF GENSETS AS MENTIONED IN THE REASONS RECORDED FOR REOPENING THE ASSESSMENT. THE ASSESSEE CATEGORICALLY STATED THAT NO ADDITIONAL CHARGES WERE PAID FOR INLAND TRANSPORTATION AT ALL TO ANYBODY. THE ASSESSEE PLACED ON RECORD THE STATEMEN T SHOWING BILL OF L ADING 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 WHI CH THE ASSESSEE HAD SUPPLIED DM 20 PUMP SETS VALUING RS.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 AGREE MENT WAS FILED BEFORE THE ASSESSING OFFICER. AS PER THE TERMS OF CONTRACT THE ASSESSEE WAS TO PAY 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 TERRITO RY ASSIGNED FOR AFTER SALES SERVICES AND IT WAS ALSO AGREED THAT THE PAYMENTS MUST BE REALIZED WITHIN 165 DAYS FROM THE DATE OF BILL OF LADING / AIRWAY BILL. THE ASSESSEE THUS EXPLAINED THAT AFTER SALES SERVICE COST WAS RESPONSIBILITY OF KIRLOSKAR MIDDL E EAST FZE AND THEY HAD NOT INCURRED ANY EXPENDITURE ON THIS ACCOUNT. AS REGARDS KICKBACKS AT AROUND 10% OF THE CONTRACT VALUE THE ASSESSEE POINTED OUT THAT NO DETAILS WERE PROVIDED BY THE ASSESSING OFFICER IN THE REASONS RECORDED FOR REOPENING THE ASSES SMENT AS TO HOW 10% WAS ARRIVED AT. THE ASSESSEE FURTHER STRESSED THAT THE COMMISSION WAS PAID TO KIRLOSKAR MIDDLE EAST FZE AS PER AGREEMENT FOR SERVICES RENDERED OUTSIDE INDIA. FURTHER WITH REGARD TO RELIANCE ON VCR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF KOLKATA BENCH OF TRIBUNAL IN TIL LTD. VS. ACIT REPORTED IN 16 SOT 33. IT WAS FURTHER STATED THAT THE COPY OF VCR ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 7 HAD NOT BEEN MADE AVAILABLE TO THE ASSESSEE AND IN CASE THE SAID REPORT HAD TO BE USED AS EVIDENCE AGAINST THE ASSESSEE THEN AN OPPORTUNITY TO REBUT THE SAME MUST BE GRANTED. THE ASSESSEE ASKED FOR COPY OF THE REPORT TO BE FURNISHED AND ALSO AN OPPORTUNITY TO CROSS - EXAMIN E TO BE GRANTED TO THE ASSESSEE. 8. THE ASSESSING OFFICER IN RESPONSE TO THE ASSESSEES REQUEST FOR FURNISHING THE COPY OF VCR VIDE ORDER SHEET ENTRY DATED 12.12.2008 REQUESTED THE ASSESSEE TO ACCESS THE SAME FROM INTERNET WHERE IT WAS AVAILABLE IN PUBLIC DOMAIN. THE ASSESSEE WAS ALSO ASKED TO SUBMIT THE DETAILS OF PAYMENT OF ASSF BY THE ASSESSEE OR ON BEHALF O F THE ASSESSEE TO THE IRAQI GOVERNMENT (HEREINAFTER REFERRED TO AS IG ) OR ANY REPRESENTATIVE OF THE IG. THE ASSESSEE WAS ALSO ASKED TO FURNISH THE COMPLETE DETAILS OF CORRESPONDENCE WITH THE SISTER CONCERN KIRLOSKAR MIDDLE EAST FZE REGARDING SPECIFICS O F THE SERVICES PROVIDED IN RESPECT OF CONTRACT WITH IG. THE ASSESSEE WAS ALSO SHOW CAUSED TO EXPLAIN AS TO WHY THE KICKBACKS AS MENTIONED IN VCR @ 10% OF THE CONTRACT VALUE SHOULD NOT BE ADDED TO THE TOTAL MENTIONED IN VCR @ 10% OF THE CONTRACT VALUE SHOULD NOT BE ADDED TO THE TOTAL INCOME. THE ASSESSEE IN REPLY POINTED OUT THAT THE REOPENING OF ASSESSMENT ON THE BASIS OF VCR WAS NOT JUSTIFIED. IT WAS FURTHER POINTED OUT THAT THE VCR REPORT DOES NOT REFER TO THE ASSESSEE IN THE MAIN BODY OF REPORT WHERE MANY OTHER COMPANIES HAVE DIRECTLY REPORTED. IT WAS ONLY IN THE ANNEXURE I. E. TABLE - 8 THAT THE NAME OF ASSESSEE APPEARED WHICH TABLE - 8 REFERS TO ACTUAL AND PROJECTED ILLICIT PAYMENTS ON CONTRACTS. THE ASSESSEE POINTED OUT THAT ON PERUSAL OF TABLE - 8 IT WOULD BE SEEN THA T GENSET DIESEL POWERED / PARTS WATER PUMPS DRIVEN BY DIESE L 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 8 WERE PROJECTED AND WERE NOT INLAN D 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 SAI D 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 POIN TED OUT THAT THE INFORMATION WAS NOT FULLY CONFIRMED BY BANK BUT ALSO IT WAS BASED ON BANKS WITH WHOM THEY HAD NEVER IN THE PAST OR EVEN IN THE PRESENT HAD ANY DEALINGS WITH . THE AUTHENTICITY OF THE SAID ENTRIES WAS DENIED AND THE ASSESSEE ASKED FOR COPIE S OF REQUISITE DOCUMENTS AND ALSO RIGHT TO CROSS - EXAMINATION. THE ASSESSEE FURTHER REITERATED THAT THEY HAD BEEN PAYING COMMISSION @ 12.5% TO ITS SISTER CONCERN FOR THE EXPORT BUSINESS IN MIDDLE EAST AND THE SAID COMMISSION OF 12.5% WAS IN RESPECT OF ALL EXPORTS TO VARIOUS COUNTRIES AND MIDDLE EAST AND THE SAID COMMISSION WAS BEING PAID FOR THE LAST MORE THAN 10 YEARS. THE ISSUE OF PAYMENT OF COMMISSION TO PAID FOR THE LAST MORE THAN 10 YEARS. THE ISSUE OF PAYMENT OF COMMISSION TO KIRLOSKAR MIDDLE EAST FZE AS EXPENDITURE DURING VARIOUS ASSESSMENT PROCEEDINGS WAS ALLOWED UNDER SEC TION 143(3) OF THE ACT FOR ALMOST ALL EARLIER YEARS. ANOTHER POINT RAISED BY THE ASSESSEE WAS THAT THE PAYMENT TO KIRLOSKAR MIDDLE EAST FZE WAS MADE THROUGH NATIONALIZED BANK OF ABU DHABI WH ICH NAME DID NOT APPEAR IN THE LIST MENTIONED IN TABLE 8. THE SA MPLE PROOF OF PAYMENT AND COPIES OF CORRESPONDENCE IN THIS REGARD WERE ALSO SUBMITTED. 9. THE ASSESSING OFFICER AFTER CONSIDERING SUBMISSIONS OF ASSESSEE OBSERVED THAT THOUGH THE VCR DOES NOT MENTION THE NAME OF ASSESSEE IN THE BODY OF REPORT BUT THE FA CT REMAINS THAT THE NAME OF ASSESSEE COMPANY APPEARS IN THE LIST OF SUPPLIERS MAKING ILLICIT PAYMENTS TO IG IN TABLE 8 REFERRED TO AS COMMITTEE FOR HUMANITARIAN KICKBACK TABLE IN THE REPORT . THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAD NOT DENIED THE SAID FACT . WITH REGARD TO THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 9 ARGUMENT S OF ASSESSEE REGARDING NON - MENTION OF ANY AMOUNT UNDER THE HEAD INLAND TRANSPORTATION FEES AND ENTRIES UNDER THE HEAD AS S F ON THE BASIS OF PARTIAL CONFIRMATION WERE ALSO CONSIDERED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER OBSERVED THAT THE CONTRACT EXECUTED BY THE ASSESSEE COMPANY WAS ONE OF THE TAINTE D CONTRACTS DETECTED BY THE VCR. THOUGH THE AMOUNT OF INLAND TRANSPORTATION FEES WAS NOT MENTIONED IN THE TABLE THERE WAS REMARK THAT THE I NLAND TRANSPORTATION FEES WAS REQUIRED TO BE PAID BY THE ASSESSEE BUT SPECIFIC INFORMATION IN THIS REGARD WAS NOT AVAILABLE. SIMILAR WAS THE POSITION AS TO PAYMENT OF ASF FEES ALSO. THE ASSESSING OFFICER WAS OF THE VIEW THAT WHERE THE EVIDENCE IN THE FOR M OF REPORT OF INDEPENDENT ENQUIRY COMMITTEE APPOINTED BY THE UNITED NATIONS SECURITY COUNCIL WAS AVAILABLE IN PUBLIC DOMAIN WHICH HAD ANALYZED AND EXAMINED THE ENTIRE SCHEME OF O IL FOR FOOD UNDERTAKEN BY THE UNITED NATIONS ; AND WHERE T HE COMMITTEE AFTER NECE SSARY 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 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 CORRES PONDING 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 REPOR T. 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 AC TION AGAINST UNSC AND MR. VOLCKER AND NO ACTION WAS TAKEN BY THE ASSESSEE COMPANY . S INCE THE COMMITTEE HAD SENT NOTICES TO THE IMPUGNED COMPANIES BUT ACCORDING TO THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 10 INFORMATION AVAILABLE NONE OF THE INDIAN FIRMS RESPONDED THERETO AND VERACITY OF VCR S TANDS ESTABLISHE D AND COULD BE RELIED UPON AS EVIDENCE. 10 . THE ASSESSING OFFICER THUS WAS OF THE VIEW THAT THE ASSESSEE COMPANY HAD ENTERED INTO CONTRACT WITH IG FOR SUPPLY OF HUMANITARIAN GOODS. AS PER VCR THE ASSESSEE WAS ONE OF THE COMPANIES WHICH HAD PAID HUMANITARIAN KICKBACKS TO THE IG. FURTHER KICKBACKS PAID BY THE COMPANIES CONCERNED WERE RECOVERED BY INCORPORATING THE ILLEGAL PAYMENTS AS MARK UP IN INVOICES UNDER THE HEAD OF AFTER SALES SERVICES FEES. THE CONTRACTORS PAID KICKBACKS BEFORE THEIR GOODS WERE PERMITTED TO ENTER IRA Q . THE ASSESSING OFFICER WAS OF THE VIEW THAT KICKBACKS IN VIEW OF ITS VERY NATURE WOULD HAVE BEEN PAID OUTSIDE THE BOOKS OF ACCOUNT. THE ASSESSING OFFICER OBSERVED THAT AS PER VCR KICKBACKS PAID ON ALL HUMANITAR IAN CONTRACTS WERE 10% OF THE CONTRACT VALUE . T HEREFORE HE TREATED 10% OF CONTRACT VALUE AS INCOME OF THE ASSESSEE AS UNEXPLAINED EXPENDITURE UNDER SECTION 69C OF THE ACT. THE CONTENTION OF ASSESSEE THAT THE COMMISSION AND FREIGHT PAID BY IT HAD THE ACT. THE CONTENTION OF ASSESSEE THAT THE COMMISSION AND FREIGHT PAID BY IT HAD BEEN DE BITED TO PROFIT & LOSS ACCOUNT AND THE TRANSACTION DID NOT INVOLVE ANY ILLEGAL PAYMENT OF ANY KIND WHICH REQUIRED TO BE DISALLOWED WERE FOUND TO BE NOT ACCEPTABLE. THE ASSESSING OFFICER IN THIS REGARD OBSERVED THAT SUBSEQUENT PAYMENT OF FREIGHT BY THE AS SESSEE AND DEBITING THE SAME TO THE PROFIT & LOSS ACCOUNT WAS NOT MATERIAL AS THE KICKBACKS WERE PAID BEFORE THE GOODS ACTUALLY REACHED IRAQ. THE ASSESSING OFFICER CONCLUDED BY OBSERVING AS UNDER: - THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE IS ALS O NOT OF MUCH RELEVANCE AS THE INLAND TRANSPORTATION FEES PROVIDED IN THE CONTRACT FAR EXCEEDED THE ACTUAL TRANSPORTATION COST. NEEDLESS TO MENTION THIS WAS DONE TO PERMIT THE CONTRACTORS TO RECOVER THE KICK BACKS PAID BY THEM. THEREFORE 10% OF CONTRAC T VALUE AMOUNTING TO RS.1 47 58 950.20 SHOULD BE ADDED TO THE INCOME DECLARED BY THE ASSESSEE AS THE SAME IS PAID OUTSIDE THE BOOKS OF ACCOUNT. EVEN IF THE PAYMENT IS MADE THROUGH BOOKS WHICH IS HIGHLY UNLIKELY THE SAME IS NOT ALLOWABLE AS DEDUCTION AS PER THE INCOME TAX ACT. TO SUM UP: ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 11 ( I ) THE EVIDENTIARY VALUE OF VOLCKER COMMITTEE REPORT IS TREMENDOUS AND IMPORTANCE OF THE SAME NEED NOT BE OVER EMPHASIZED. ( II ) THE ASSESSEE COULD NOT REBUT THE EVIDENCES CONTAINED IN THE REPORT THOUGH OPPORTUNITY WAS PROVIDE D 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. 1 1 . THE C IT(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) RE FERRED TO THE VCR ACCORDING TO WHICH THE SUPPLIERS / CONTRACTORS FOR OIL FOR FOOD PROGRAMME IN IRAQ WERE FOUND TO BE IN DULGING IN ILLEGAL PAYMENT OF KICK BACKS FOR THE CONTRACTS AND THE ASSESSEES 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 T HE OIL FOR FOOD PROGRAMME OF UN THE CIT(A) NOTED THAT AS A RESULT OF INVASION OF KUWAIT BY IRAQ SANCTIONS WERE IMPOSED ON IRAQ REGIME. HOWEVER DUE TO WORSENING ECONOMIC AND HUMANITARIAN CONDITIONS IN IRAQ UNSC HAD APPROVED OIL FOR FOOD PROGRAMME ON 14 .05.1995 ACCORDING TO WHICH THE PETROLEUM PRODUCTS WERE TO BE IMPORTED FROM IRAQ BUT NO MONEY WAS TO BE PAID DIRECTLY AGAINST THAT INSTEAD THE AMOUNT WAS TO BE RECEIVED IN ESCROW ACCOUNT ESTABLISHED BY UN SECRETARY GENERAL . HOWEVER FOR INVESTIGATION I NTO THE ALLEGATION OF KICKBACKS BEING PAID TO IG VOLCKER COMMITTEE WAS ESTABLISHED BY THE UN WHICH GAVE REPORT THAT THE PAYMENTS WERE MADE BY DIFFERENT ENTITIES IN THE FORM OF INLAND TRANSPORTATION FEES AND AFTER SALES SERVICE FEES WHICH WERE ILLICIT PA YMENTS FOR KICKBACKS. ACCORDING TO THE VCR THESE PAYMENTS WERE NOT AUTHORIZED UNDER THE PROGRAMME AND THE INLAND TRANSPORTATION ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 12 FEES HAVE EXCEEDED THE ACTUAL TRANSPORTATION COST. FURTHER 10% OF KICKBACKS WAS ALSO BEING PAID TO IRAQ REGIME UNDER ASSF W HICH WAS IN ADDITION TO THE INLAND TRANSPORTATION FEES. FOR THIS PURPOSE CONTRACT PRICES WERE INFLATED TO ENABLE THE CONTRACTORS TO DRAW THE REQUIRED AMOUNT FROM ESCROW ACCOUNT. THE CIT(A) NOTED THAT IN THE ASSESSMENT PROCEEDINGS THE ASSESSEE HAD DENIE D TO HAVE MADE ANY SUCH PAYMENTS IN THE FORM OF ASSF. FURTHER THE CONTENTION OF ASSESSEE WAS THAT IT HAD APPOINTED KME AS DISTRIBUTOR FOR EXPORTS TO MIDDLE EAST COUNTRIES TO WHOM 12.5% COMMISSION WAS BEING PAID FOR PROCURING OF ORDERS REALIZATION OF PA YMENTS AND AFTER SALES SERVICE WAS THE RESPONSIBILITY OF KME AND THE ASSESSEE DID NOT INCUR ANY SUCH EXPENDITURE. 12. THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS BEFORE THE CIT(A) WHICH ARE INCORPORATED UNDER PARA 14 AT PAGES 12 TO 19 OF THE APPELLATE OR DER. THE FIRST CONTENTION RAISED BY THE ASSESSEE WAS THE RELIANCE ON VCR ON ASSUMPTION THAT THE REPORT WAS EVIDENCE IN ITSELF AND ITS CONTENTS NEED NOT TO BE PROVIDED. REFERENCE REPORT WAS EVIDENCE IN ITSELF AND ITS CONTENTS NEED NOT TO BE PROVIDED. REFERENCE WAS MADE TO SECTION 74 OF INDIAN EVIDENCE ACT TO POINT OUT THAT A DOCUMENT I N ORDER TO BE A PUBLIC DOCUMENT UNDER THIS CLAUSE MUST ITSELF FORM THE ACT OF AUTHORITY. THE REPORT WHICH WAS PREPARED BY THE AUTHORITIES DOES NOT FORM PART OF THE ACTS OF THE AUTHORITY. THUS WHERE THE GOVERNMENT APPOINTS COMMITTEE THEN THE RESOLUTION / NOTIFICATION NOTIFYING THE COMMITTEE FORM S THE ACT OR THE RECORD OF A CTS OF THE GOVERNMENT. HOWEVER THE REPORT SUBSEQUENTLY SUBMITTED BY THE COMMITTEE WOULD NOT FORM THE ACTS OF AUTHORITIES AT ALL. IT WAS STRESSED BY THE ASSESSEE THAT VCR WOULD NOT FA LL 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 PUBL IC 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 13 IT WAS POINTED OUT THAT N OWHERE 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 OFFICERS BALD ASSERTION ON PAGE 8 OF IMPUGNED ORDE R 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 RELEVANCE AND ADMISSIBILITY AND THE USUAL PRINCIPLES OF APPRECIATION OF EVIDENCE CONTINUES TO APPLY. RELIA NCE WAS PLACED ON THE DECISION IN BERLIAS CASE AIR 1983 BOM 1 FOR THE PROPOSITION THAT X IS A PUBLIC DOCUMENT DOES NOT MEAN THAT NO EVIDENCE IS NEEDED FOR PROVING THE TRUTH OF WHAT X STATES. THE HONBLE BOMBAY HIGH COURT IN THE SAID CASE HAD HELD TH AT THE PUBLIC DOCUMENT DO NOT ESTABLISH EVEN PRIMA FACIE THE CORRECTNESS OF CONTENTS . IN THE ALTERNATE THE ASSESSEE POINTED OUT THAT EVEN ASSUMING THAT VCR WAS A PUBLIC ALTERNATE THE ASSESSEE POINTED OUT THAT EVEN ASSUMING THAT VCR WAS A PUBLIC DOCUMENT APPLYING THE PRINCIPLE ENUNCIATED BY THE HONBLE BOMBAY HIGH COURT THAT DOES NOT EVEN PRIMA FACIE MEAN THAT THE CONTENTS OF REPORT ARE TRUE. THE ASSESSEE STRESSED THAT THE REPORT DID NOT PROVIDE ENOUGH MATERIAL TO DRAW FACTUAL CONCLUSIONS AGAINST THE ASSESSEE. SINCE THE VCR DOES NOT REFER TO THE ASSESSEE COMPANY IN THE BODY OF REPORT AT ALL THE ASSESSING OFFICER HAD ALSO ADMITTED THIS FACT BUT THE ASSESSING OFFICER POINTED OUT THAT THE NAME OF ASSESSEE COMPANY APPEARED IN THE LIST OF SUPPLIERS MAKING ILLICIT PAYMENTS TO THE IG IN THE TABLE 8 REFERRED TO AS A COMMITTEE FOR HUMANITARIAN KICKBACK TABLE IN THE REPORT . STRICTLY IN THE ALTERNATE IT WAS POINTED OUT THAT EVEN IF IT IS TO BE ASSUMED THAT VCR HAD MADE REFERENCE TO THE ASSESSEE COMPANY SINCE THE STATEMENT / DATA RELIED UPON WERE NOT MADE AVAILABLE TO THE ASSESSEE COMPANY AND HENCE THERE WAS FAILURE OF NATURAL JUSTICE AND THE SAID VCR COULD NOT BE RELIED ON. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 14 13. ANOTHER SET OF OBJECTIONS WERE RAISED BY THE ASSESSEE ON INVOCATION OF SECTION 69C OF THE ACT. IT WAS STRESSED THAT ONE OF PRE - CONDITIONS FOR APPLICATI ON OF SECTION 69C OF THE ACT WAS THE BURDEN OF PROOF ON THE REVENUE TO SHOW THAT SUCH EXPENDITURE HAD BEEN INCURRED. WHERE THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE NOR HAD CLAIMED ANY EXPENDITURE THERE WAS NO MERIT IN APPLYING THE PROVISIONS OF SECT ION 69C OF THE ACT. THE ASSESSEE STRESSED THAT THE ASSESSING OFFICER HAD ASSUMED THE EXPENDITURE INSTEAD OF PROVING IT SINCE THE ASSESSING OFFICER IN PARA 13 OF ASSESSMENT ORDER STATED THAT KICKBACKS WOULD HAVE BEEN PAID. THE ASSESSEE ALLEGED THAT THIS WAS CLEARLY DIFFERENT FROM FACTUAL CONCLUSION THAT KICKBACKS WERE PAID. CONSEQUENTLY ESSENTIAL FACT OF UNACCOUNTED EXPENDITURE ACTUALLY HAVING BEEN INCURRED HAS NOT BEEN PROVED. THE ASSESSEE FURTHER EXPLAINED THE NATURE OF COMMISSION PAID TO ITS SISTER CONCERN 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 1 ST APRIL 1997 AND THE MAXIMUM COMMI SSION THAT COULD BE PAID TO COMPANY SINCE 1 ST APRIL 1997 AND THE MAXIMUM COMMI SSION 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 EGY PT 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 SAL ES 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 OF FIGURE OF USD 161506. THE CIT(A) NOTED THE BACKGROUND OF CONSTITU TION AND FUNCTIONING OF VCR ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 15 APPOINTED BY UNSC TO LOOK INTO THE IRREGULARITIES AND ALLEGATION OF KICKBACK S PAID UNDER OIL FOR FOOD PROGRAMME OF UN IN ITS HUMANITARIAN AID SCHEME. AS PER VCR KICKBACKS WERE PAID UNDER THE HEAD INLAND TRANSPORTATION FEES AN D ALSO 10% KICKBACKS ON HUMANITARIAN CONTRACT WAS PAID UNDER THE HEAD ASSF. IN ASSESSEES CASE ADDITION WAS MADE FOR UNEXPLAINED EXPENDITURE @ 10% ON TOTAL VALUE OF CONTRACT. THE CIT(A) ANALYZED THE VCR AND POINTED OUT THAT AS PER THE SAID REPORT KIC KBACKS WERE PAID TO IG BY WAY OF INLAND TRANSPORTATION CHARGES AND ASSF AFTER MANIPULATING THE CONTRACT AMOUNTS FOR SUCH CONTRACTS. THE CIT(A) FURTHER OBSERVED THAT SUCH ILLICIT PAYMENTS OF KICKBACKS WERE NOT AUTHORIZED UNDER OIL FOR FOOD PROGRAMME AND WA S IN CONTRAVENTION OF RESOLUTION OF UN SECURITY COUNCIL WHICH WAS THE AUTHORITY UNDER THE UN CHARTER TO IMPOSE ECONOMIC SANCTIONS WHEREVER NECESSARY TO MAINTAIN AND RESTORE INTERNATIONAL PEACE AND SECURITY. THE CIT(A) WAS OF THE VIEW THAT IN THE WAKE OF REPORT OF VCR AND SURROUNDING CIRCUMSTANCES IN WHICH THE PAYMENTS WERE MADE ONUS WAS CAST UPON THE ASSESSEE TO PROVE THAT THE EXPENDITURE WAS GENUINE AND WAS INCURRED FOR THE SERVICES RENDERED AND P URPOSE EXPENDITURE WAS GENUINE AND WAS INCURRED FOR THE SERVICES RENDERED AND P URPOSE WHICH WAS NOT PROHIBITED BY LAW. THE CONTENTION OF ASSESSEE THAT ITS NAME WAS NOT APPEARING IN MAIN BODY OF VCR WAS REJECTED BY THE CIT(A) AS IN THE ANNEXURE THE NAME OF APPELLANT WAS CLEARLY MENTIONED IN TABLES 7 AND 8 OF REPORT AND SUCH AN ANNEXURE WAS TO BE READ AS PART AND PARCEL OF THE REPORT. M EETING THE ARGUMENT OF ASSESSEE THAT THERE WAS NO RELEVANCE OF THE FINDINGS OF VCR UNDER INDIAN LAW S THE CIT(A) OBSERVE D THAT UN CHARTER WAS A MULTILATERAL TREATY THAT SERVES UN CONSTITUTION AND CHARTER CONTAINS SUPR EMACY CLAUSE THAT MAKES IT HIGHEST AUTH ORITY OF INTERNATIONAL LAW AND ALL THE MEMBERS ARE BOUND BY ITS ARTICLES. AFTER DISCUSSING THE ISSUE AT LENGTH THE CIT(A) CONCLUDED THAT THE RELIANCE ON VCR FOR THE PURPOSE OF T AX ASSESSMENT UNDER THE INDIAN INCOME TAX ACT HAD GOT FIRM BASIS AND THE ASS ESSEES CONTENTION IN THIS REGARD WAS HELD TO BE UNTENABLE. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 16 1 4 . WITH REGARD TO RELIANCE PLACED UPON BY THE ASSESSEE ON THE RATIO LAID DOWN BY CALCUTTA BENCH OF TRIBUNAL IN TIL LTD. VS. ACIT (SUPRA) THE CIT(A) OBSERVED THAT IN THE FACTS OF THE SAID CASE THERE WAS FINDING THAT NEITHER THE 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 S ECOND 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 I N 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 ANNEXURE TO THE MAIN VCR THEN IT COULD NOT BE SAID THAT THE ASSESSEE HAD NOT READ AND UNDERSTO OD 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. 1 5 . THE NEXT OBJECTION RAISED BY THE ASSESSEE WAS AGAINST THE APPLIC ATION OF SECTION 69C OF THE ACT FOR UNEXPLAINED EXPENDITURE. THE ASSESSEE CLAIMED THAT WHEN THE ALLEGED EXPENDITURE HAD BEEN DEBITED TO PROFIT & LOSS ACCOUNT SOURCE OF SUCH EXPENDITURE STOOD EXPLAINED AUTOMATICALLY. THE CIT(A) HELD THE SAID CONTENTION WAS NO T CORRECT AND CONTRARY TO ASSESSEES EXPLANATIONS DATED 10.06.2011 AND 29.06.2011 IN WHICH IT HAD BEEN EXPLAINED THAT NOTHING HAD BEEN DEBITED AND CLAIMED AS EXPENDITURE IN THE PROFIT & LOSS ACCOUNT RELATING TO THIS CONTRACT UNDER ASSF OR INLAND TRANSPO RTATION CHARGES. THE CIT(A) WAS OF THE VIEW THAT THERE WAS NO DOUBT THAT SUCH EXPENDITURE WAS INCURRED IN VIEW OF ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 17 EXTENSIVE ANALYSIS OF ENTIRE CIRCUMSTANCES OF PAYMENT OF KICKBACKS AS REVEALED FROM THE VCR. THE CIT(A) NOTED THAT IT WAS AN ADMITTED FACT T HAT THE ASSESSEE HAD SUPPLIED PUMPS AND OTHER SUCH ITEMS TO THE IG UNDER HUMANITARIAN CONTRACT / OIL FOR FOOD PROGRAMME OF UNSC . FURTHER IN THE VCR ANNEXURE AT TABLE 8 THE ASSESSEE COMPANYS NAME DULY FIGURED AND SPECIFIC AMOUNT OF ASSF PAYMENT AMOUNTI NG TO USD 161056 WAS ALSO MENTIONED IN THE TABLE WHICH RELATES TO THE ASSESSEE. THE CIT(A) IN THIS REGARD OBSERVED THAT IT DOES NOT MATTER WHETHER THE ASSESSEES NAME WAS MENTIONED IN MAIN BODY OF THE REPORT OR IN ANNEXURE IN TABLE 8 AND ASSESSEES OBJE CTION WAS THUS HELD TO BE NOT ACCEPTABLE SINCE THE NAME OF ASSESSEE APPEARED IN THE LIST OF SUPPLIERS MAKING ILLICIT PAYMENTS TO IG MENTIONED IN TABLE 8 REFERRED TO AS COMMITTEE FOR HUMANITARIAN KICKBACK TABLE WHICH AS PER THE CIT(A) THE ASSESSEE HAD N OT DENIED IT WAS HELD THAT THIS REFLECTED THE EXPENDITURE WHICH WAS UNEXPLAINED. THE CIT(A) HELD THAT WHERE THE EXPENDITURE PAID FOR ASSF RELATED TO SUPPLIES MADE BY THE ASSESSEE COMPANY AND WAS NOT DEBITED TO BOOKS OF ACCOUNT THEN IN SUCH A SITUATION INVOKING OF SECTION 69C OF THE ACT WAS PROPER AND CORRECT IN THEN IN SUCH A SITUATION INVOKING OF SECTION 69C OF THE ACT WAS PROPER AND CORRECT IN LAW. THE CIT(A) HELD THAT SINCE PAYMENT OF SUCH A KICKBACK TO THE IRAQI GOVERNMENT UNDER THE HUMANITARIAN CONTRACTS WAS FOUND TO BE COMPULSORY AND THE LIST OF SUCH COMPANIES INCLUDED THE APPELLA NT COMPANY ALSO THE ASSESSING OFFICER WAS RIGHT IN MAKING AN ADDITION U/S 69C FOR UNEXPLAINED EXPENDITURE. THE CIT(A) UPH E LD THE ORDER OF ASSESSING OFFICER IN MAKING THE AFORESAID ADDITION UNDER SECTION 69C OF THE ACT. 1 6 . THE ASSESSEE IS IN APPEAL AGAI NST THE ORDER OF CIT(A). 1 7 . THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE AGAINST REOPENING OF ASSESSMENT WAS NOT PRESSED AND HENCE THE SAME IS DISMISSED AS NOT PRESSED. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 18 1 8 . 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 AN D 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 RS.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 O F 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 ASSESSEE WAS NOT SUFF ICIENT TO DISCHARGE THE BURDEN CAST UPON THE REVENUE ESPECIALLY WHEN VCR WAS ITSELF DISCHARGE THE BURDEN CAST UPON THE REVENUE ESPECIALLY WHEN VCR WAS ITSELF BASED ON GUES S WORK. 1 9 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN RESPECT OF THE ISSUE OF DISALLOWANCE UNDER SECTION 69C OF THE ACT FIRST REFERRED TO THE ORDER OF ASSESSING OFFICER. HE FURTHER POINTED OUT THAT THE BASIS FOR AFORESAID ADDITION IN THE HANDS OF ASSESSEE IS THE VCR. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO THE CONTRACT ENTERED INTO BY THE ASSESS EE COPY OF WHICH IS PLACED AT PAGES 20 TO 27 OF THE PAPER BOOK WHI CH WAS EXECUTED ON 25.10.1999 BETWEEN THE ASSESSEE AND THE IRAQI GOVERNMENT AND REFERRED TO VARIOUS TERMS AGREED UPON . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THEREAFTER R EFERRED TO THE CONTRACT BETWEEN THE ASSESSEE AND KME DATED 01.04.1997 AND TOOK US THROUGH ITS CONTENTS AND ALSO EXTENSION OF AGREEMENT . THEREAFTER OUR ATTENTION WAS DRAWN TO THE DETAILS OF EXPORTS MADE THROUGH KME ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 19 AND THE AGENCY COMMISSION PAID ON EXPORT BUSINESS FOR THE FINANCIAL YEAR 2000 - 01 AS PER TABULATED DETAILS PLACED AT PAGES 130 TO 132 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE COMMISSION WAS PAID TO KME @ 12.5% ON ALL EXPORTS TO VAR IOUS COUNTRIES INCLUDING IRAQ . I N THE SAID LIST ITSELF THE NAME OF COUNTRY IS ALSO MENTIONED. IN THIS REGARD HE SUBMITTED THAT AGAINST EXPORT TO IRAQ NOTHING ABOVE 12.5% WAS PAID BY KME . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO PAGE 8 OF ANNEXURE TO VCR AND POINTED OUT THAT AMOUNTS TO RELATE TO THREE YEARS. 20 . REFERRING TO THE ORDER OF ASSESSING OFFICER WHEREIN REFERENCE WAS MADE TO THE AMOUNTS FINANCIAL DATA INCOME FROM BANKS IT WAS ARGUED BY THE LEARNED AUTHORIZED REPRESENTATIVE FO R THE ASSESSEE THAT NO EVIDENCE IN THIS REGARD WAS CONFRONTED TO THE ASSESSEE . WITH REGARD TO VCR IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THOUGH HE HAS THE COPY OF SAID REPORT BUT IT WAS NEVER CONFRONTED BY THE A SSESSING OFFICER AND THE DETAILS WERE REPORT BUT IT WAS NEVER CONFRONTED BY THE A SSESSING OFFICER AND THE DETAILS WERE NEVER BROUGHT TO THE ASSESSEES KNOWLEDGE AND THE ASSESSING OFFICER HAS RELIED ON THE SAID INFORMATION TO MAKE THE ADDITION IN THE HANDS OF ASSESSEE. HE STRESSED THAT NO QUERY WAS RAISED TO THE ASSESSEE BY MR. VOLCKER AND NOT EVEN SINGLE CORRESPONDENCE WAS RECEIVED FROM MR. VOLCKER AND IN THE ABSENCE 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 COMPA NY 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 LEA RNED 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 RS.1.47 CRORES AND IN ASSESSMENT YEAR 2002 - 03 IT ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 20 WAS TO THE EXTENT OF RS. 90 70 637/ - WHEREAS THE AMOUNT OF ASS F WRITTEN IN THE DOCUMENT WAS USD 161056 EQUAL ED TO RS.85 LAKHS. 2 1. ON THE NEXT DATE OF HEARING WHEN THE MATTER CONTINUED THE LEARNED AUTHO RIZED 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 HA D INCURRED THE SAID EXPENDITURE WHICH WA S TREATED AS UNEXPLAINED AND ADDED IN THE HANDS OF ASSESSEE. HE FURTHER STATED THAT THE DEPARTMENTS CASE WAS THAT SINCE THE ASSESSEES NAME WAS IN VCR THEN THE ASSESSEE MUST HAVE PAID THE KICKBACKS . HE REFERRED TO VARIOUS PORTIONS OF VCR TO POINT OUT THAT THE S AID REPORT WAS BASED ON PRESUMPTIONS AS CONCRETE DATA WAS NOT AVAILABLE. 22 . THE NEXT CONTENTION RAISED BY THE ASSESSEE WAS WITH REGARD TO THE CLAIM OF ASSESSING OFFICER THAT THE SAME WAS IN PUBLIC DOMAIN AND HAD EVIDENTIARY VALUE. IN ASSESSING OFFICER THAT THE SAME WAS IN PUBLIC DOMAIN AND HAD EVIDENTIARY VALUE. IN THIS REGARD H E POINTED OUT THAT THE PRIME MINISTER HAD COMMENTED ON THE VCR REPORT IN LOK SABHA AND THE SAME WAS REPORTED ON 02.12.2005. HE REFERRED TO THE INVOLVEMENT OF CERTAIN INDIAN ENTITIES AND INDIVIDUALS IN VCR AS NON - CONTRACTUAL BENEFICIARIES IN THE IRAQ OIL F OR FOOD PROGRAMME. THE GOVERNMENT IN REPLY HAD STATED THAT THE REFERENCES FOUND IN VCR WERE UNVERIFIED REFERENCES AND TRUTH OF THE SAME HAD TO BE ESTABLISHED. THEN OUR ATTENTION WAS DRAWN TO G A ZETTE OF INDIA PUBLISHED ON 11.11.2005 AND IT WAS POINTED OU T BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE GOVERNMENT DID NOT RELY PRIMA FACIE ON VCR ; EVEN THE PATHAK COMMITTEE WAS CONSTITUTED TO REBUT THE FINDINGS OF VCR. HE FURTHER REFERRED TO THE SUBMISSIONS MADE BEFORE THE CIT(A) IN THIS REGARD AND POINTED OUT THAT EVEN IF IT WAS A PUBLIC DOCUMENT ITS TRUTH HAD TO BE ESTABLISHED. IN THIS REGARD HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN OM PRAKASH BERLIA AND ANR. VS. UNIT TRUST OF INDIA AND ORS. REPORT ED IN ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 21 AIR 1983 BOM 1 WHEREIN THE HONBLE BOMBAY HIGH COURT HAD HELD THAT THE CERTIFIED COPY OF PUBLIC DOCUMENT COULD BE ADMITTED AS SECONDARY EVIDENCE BUT THE TRUTH OF DOCUMENT IS TO BE ESTABLISHED SEPARATELY. HE NEGATED THE RELIANCES PLACED UPON BY CIT( A) AND ASSESSING OFFICER IN THIS REGARD WHO SAID THAT VCR WAS THE TRUTH. HE FURTHER STATED THAT HE WAS NOT SAYING WHETHER VCR WAS TRUE OR FALSE BUT THE CONTENTS OF THE SAME RELATE TO THE ASSESSEE OR NOT HAS TO BE ESTABLISHED. MAKING REFERENCE TO OBSERVA TIONS OF CIT(A) IN PARA 23 OF THE APPELLATE ORDER WHEREIN THE CIT(A) STATED THAT UN CHARTER SHALL PREVAIL OVER INTERNATIONAL OBLIGATIONS IN THE CONTEXT THAT VCR HAS BINDING EFFECT T HE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE SAME WAS NOT RELEVANT TO DECIDE THE ISSUE AT HAND. HE FURTHER SUBMITTED THAT VCR WAS NOT BINDING WHERE THE TRIBUNAL HAD EXPRESSED DOUBTS AND EVEN THE GOVERNMENT OF INDIA HAD EXPRESSED DOUBTS ABOUT ITS TRUTH. 2 3 . COMING TO THE PROVISIONS OF SECTION 69C OF THE ACT THE LEARNED AUTHORIZED 2 3 . 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. SHAH ZAD LOOKMAN QADIR (2010) 3 ITR (TRIB) 177 (MUM) AND HONBLE GUJARAT HIGH COURT IN KRISHNA TEXTILES VS. CIT (2009) 310 I TR 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 H AVE FAILED THEN NO ADDITION CAN BE MADE IN THE HANDS OF ASSESSEE. ANOTHER ASPECT OF THE SAID ADDITION WAS THE D ENIAL OF OPPORTUNITY TO CROSS - EXAMIN E 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. SUM AN 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. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 22 2 4 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURNISHED A FLOW CHART OF PA YMENT OF KICKBACKS TO IG WHICH IS PLACED ON RECORD. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE ASSESSEE WAS SUPPLIER OF GOODS AND THE CONTRACT WAS INCLUSIVE OF INLAND TRANSPORTATION FEES AND / OR ASSF BUT THE PAYMENT OF COMMISSION TO THE RELATED PARTY WAS SHOWN UNDER THE HEAD REMUNERATION AND COMMISSION WHICH WAS ON ACCOUNT OF ASSF AND FOLLOW UP OF PAYMENTS. HE STRESSED THAT THE MARKETING CONCERN OF ASSESSEE I.E. KME WAS THE INTERMEDIAT O RY TO ROUTE THE FUNDS WHICH IN T URN WERE PAID TO THE FRONT CONCERN S OF I G WHICH WERE BASED I N JORDAN . T HEY RETAINS 1% AND BALANCE WAS PASSED TO THE IG AND THEY ADMITTED TO HAVE NOT RENDERED ANY INLAND TRANSPORTATION FEES. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRESSE D THAT WHERE THE ASSESSEE PAYS TO THE INTERMEDIATORY BUT EVENTUALLY THE SAID AMOUNT REACHES IG THEN IT IS KICKBACK AND THE SAME IS NOT TO BE ALLOWED IN THE HANDS OF ASSESSEE. OUR ATTENTION WAS DRAWN TO THE TERMS OF CONTRACT WHICH WERE FOR SUPPLY OF GOODS TILL THE DESTINATION POINT AND EVEN AFTER SALES SERVICES WERE TO BE PROVIDED BY THE DESTINATION POINT AND EVEN AFTER SALES SERVICES WERE TO BE PROVIDED BY THE ASSESSEE. OUR ATTENTION FURTHER WAS DRAWN TO THE TERMS OF AGREEMENT WHEREIN IT WAS PROVIDED THAT THE COMMISSION WAS TO BE REMITTED ONLY ON REALIZATION OF EXPORT PROCEEDS. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED ON RECORD THE APPELLATE ORDER IN THE CASE OF KIRLOSKAR BROTHERS RELATING TO ASSESSMENT YEAR 2003 - 04 WHEREIN THE CIT(A) UNDER PARA 2.3.12 HAD AFTER DELIBERATING UPON THE ISSUE GIVEN A FINDING THAT THE COMMISSION WAS DEDUCTED BY SISTER CONCERN FROM THE EXPORT PROCEEDS WHICH WERE REMITTED TO THE ASSESSEE. FURTHER HE REFERRED TO THE DELIBERATIONS OF CIT(A) IN THIS REGARD IN THE APPEAL RELATING TO ASSESSMENT YEAR 2003 - 04 IN THE CASE OF KIRLOSKAR BROTHERS LTD. AND POINTED OUT THAT THE CIT(A) HAS CONSIDERED THE BANK ADVI C E WHICH TALKS OF 10%. HE FURTHER STATED THAT IN THE HANDS OF KIRLOSKAR BROTHERS LTD. THERE WAS EVIDENCE OF DIRECT PAYMENT TO M/S. ALIA FOR TRANSPORTATION & GENERAL TRADING CO. (I N SHORT ALIA) WHEREIN THE ASSESSEE REPLIED THAT KME HAD RECEIVED DIRECT BILLS OF ALIA. IN ASSESSMENT YEAR 2002 - 03 IN THE CASE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 23 OF KIRLOSKAR BROTHERS LTD. THERE WAS PAYMENT MADE TO AL AZAR TRADING COMPANY DUBAI (IN SHORT AL AZAR ) WHICH WAS ANOTHER F RONT CONCERN OF IG. OUR ATTENTION WAS INVITED TO THE DELIBERATIONS OF CIT(A) IN THE CASE OF KIRLOSKAR BROTHERS LTD. RELATING TO ASSESSMENT YEAR 2002 - 03 AT PAGE 19 OF THE APPELLATE ORDER. IT WAS FURTHER ALLEGED THAT FINAL PAYMENTS WERE MADE TO THE IG THRO UGH 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 200 3 . 2 5 . COMING TO THE NEXT ASPECT I.E. EVIDENCE OF INLAND TRANS PORTATION 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 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 I T HAS NOT BEEN ESTABLISHED WHETHER SISTER CONCERN HA D 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 AD MITTED . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURTHER POINTED OUT THAT EARLIER KICKBACKS WERE PAID IN THE FORM OF INLAND TRANSPORTATION SERVICES AND LATER IT WAS IN THE FORM OF AFTER SALES SERVICES CHARG ES. THOUGH THE ASSESSEE SAYS THAT UN HAD APPROVED THE CONTRACT OF ASSESSEE BUT UN SANCTIONS AS PER ANNEXURE - 1 ONLY TALKS OF EXPORT OF ITEMS AND IT DOES NOT TALK OF INLAND TRANSPORTATION OR AFTER SALES SERVICE CHARGES WHEREAS BEFORE THE V CR THE ASSESSEE DOES NOT APPEAR OR EVEN DO NOT TAKE ANY ACTION AGAINST VCR BUT NOW BEFORE THE INCOME TAX AUTHORITIES HE CLAIMED THAT NO OPPORTUNITY WAS ALLOWED TO HIM BY THE VCR. ANOTHER CONTENTION OF THE ASSESSEE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 24 WAS THAT THE BANK ACCOUNT WAS NOT HIS BUT DEFINITELY IT WAS THE ACCOUNT IN WHICH KICKBACKS WERE DEPOSITED. WITH REGARD TO PATHAK COMMITTEE THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE SAME HAS NO RELEVANCE TO THE FACTS OF THE CASE. HE PLACED RELIANCE ON THE RATIO LAID DOWN BY MUMBAI BENCH OF TRIBUNAL IN M/S. CIPLA LTD. VS. ACIT IN ITA NOS.7284 TO 7286/M/2007 RELATING TO ASSESSMENT YEARS 2001 - 02 TO 2003 - 04 VIDE ORDER DATED 29.07.2009 WHEREIN THERE WAS IDENTICAL SCHEME AND SIMILAR FACTS WHERE THE ASSESSEE HA D MADE ASSF PAYME NT AND CLAIMED THE SAME AS EXPENSES. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURTHER POINTED OUT THAT THE TRIBUNAL IN MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE IN THE CASE OF M/S. CIPLA LTD. VS. ACIT (SUPRA) HA D DISMISSED THE PLEA OF ASSESSEE IN RESPECT OF SAID PAYMENTS. FURTHER THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE RATIO LAID DOWN BY DELHI BENCH OF TRIBUNAL IN HERSH W. CHADHA VS. DDIT (2011) 43 SOT 544 (DELHI) IN RESPECT OF BOFORS SCHEME WH EREIN THE ISSUE WAS DECIDED AGAINST THE ASSESSEE. OUR ATTENTION WAS DRAWN TO VARIOUS THE ISSUE WAS DECIDED AGAINST THE ASSESSEE. OUR ATTENTION WAS DRAWN TO VARIOUS OBSERVATIONS OF TRIBUNAL IN PARAS 6.11 6.14 6.42 6.43 AND 6.59 WHERE HE STRESSED THAT THE CORRECTNESS OF ASSESSEES CLAIM WAS TO BE ASCERTAINED ON THE BASIS OF MATERI AL AVAILABLE ON RECORD SURROUNDING CIRCUMSTANCES THE CONDUCT OF ASSESSEE PREPONDERANCE OF PROBABILITIES AND THE NATURE OF INCRIMINATING INFORMATION EVIDENCES AVAILABLE WITH HIM. WHERE THE ASSESSING OFFICER HAS DISCHARGED ONUS CAST UPON HIM AND CAME TO THE CONCLUSION THAT THE ASSESSEE WAS LIABLE TO TAX QUO COMMISSION PAYMENTS THEN THE SAME HAS TO BE ADDED IN THE HANDS OF ASSESSEE. 2 6 . COMING TO THE NEXT CONTENTION OF ASSESSEE WHERE THE ASSESSEE CLAIM S THAT IT HAD DELIVERED THE GOODS UPTO BAGHDAD HE S TRESSED THAT THE ASSESSEE HAS FAILED TO EXPLAIN HOW AND TO WHOM THE PAYMENTS WERE MADE AND FURTHER NO EVIDENCE HA S BEEN FILED IN RESPECT OF EXPENSES INCURRED AND EXPENDED BY HIM. FURTHER THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE REFERRED TO THE CLAIM OF ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 25 ASSESSEE BEFORE US THAT ASSF IF ANY WAS PAID TO KME A SISTER CONCERN AND NOT TO THE IG . T HEN 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 DEPARTMEN TAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT (A) ASSESSEE WAS NOT TRUTHFUL IN ITS CLAIM AND (B) THE ASSESSEES 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 APPA RENT IS NOT CORRECT. WHERE KME WAS ASSESSEE S OWN CONCERN AND IN THE ABSENCE OF ANY EVIDENCE FILED ON SERVICES GIVEN BY KME FREIGHT MIGHT HAVE BEEN PAID BY THE ASSESSEE BUT WHAT ABOUT INLAND TRANSPORT AND WHAT ABOUT ASSF CHARGES ; I N THE ABSENCE OF ANY EV IDENCE OF SAME THE ASSESSING OFFICER WAS CONSTRAINED TO MAKE THE ADDITION UNDER SECTION 69C OF THE ACT AS THE ASSESSEE FAILED TO JUSTIFY THE SOURCE OF PAYMENTS WHICH ADMITTEDLY THE ACT AS THE ASSESSEE FAILED TO JUSTIFY THE SOURCE OF PAYMENTS WHICH ADMITTEDLY HAD BEEN PAID FOR THE EXPENSES INCURRED. HE FURTHER REFERRED TO THE ORDER OF CIT(A) IN RESPECT OF ALTERNATE PLEA OF NO DEDUCTION OF TAX AT SOURCE. 2 7 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE REFERENCE TO APPELLATE ORDER IN THE CASE OF KIRLOSKAR BROTHERS LTD. BY THE LEARNED DEPARTME NTAL REPRESENTATIVE FOR THE REVENUE WAS NOT CORRECT SINCE THE FACTS WERE DIFFERENT AND THE LAW APPLIED WAS DIFFERENT AND EVEN SECTION APPLIED WAS DIFFERENT. IN THE CASE OF KIRLOSKAR BROTHERS LTD. IT WAS THE CASE OF INLAND TRANSPORTATION WHEREAS THE CA SE OF KIRLOSKAR OIL ENGINES LTD. WAS THE CASE OF PAYMENT OF ASSF CHARGES. IN THE CASE OF KIRLOSKAR OIL ENGINE LTD. ADHOC ADDITION OF 10% OF INVOICE VALUE WAS MADE WHEREAS IN THE CASE OF KIRLOSKAR BROTHERS DISALLOWANCE OF ACTUAL EXPENDITURE OF INLAND TRAN SPORTATION WAS MADE . HE POINTED OUT THAT KIRLOSKAR BROTHERS LTD HAD ADMITTED TO PAYMENT TO ALIA AND OTHERS WHEREIN ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 26 FIXED SUM WAS PAID TO ALIA WHICH WAS NOT ADMITTED BY THE ASSESSEE WHICH WAS DISALLOWED. HE REFERRED TO THE NEXT CONTENTION OF LEARNED DE PARTMENTAL REPRESENTATIVE FOR THE REVENUE THAT THE ASSESSEE HAD NOT FILED ANY EVIDENCE OF INLAND FREIGHT. IN THIS REGARD HE POINTED OUT THAT NOT A SINGLE QUESTION WAS ASKED BY THE ASSESSING OFFICER BUT THE ASSESSEE HAD PAID INDEPENDENT FREIGHT CHARGES. REFERRING TO VCR THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE SAID VCR ALSO ADMITS AND THERE IS NO MENTION OF ASSESSEES NAME UNDER THE CHARGE OF INLAND TRANSPORTATION. 2 8 . COMING TO THE ROLE OF KME THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID CONCERN LOOKS AFTER THE GROUP COMPANIES IN ALL COUNTRIES IN MIDDLE EAST ON S A ME TERMS AND CONDITIONS WHERE IN THE CONTRACT WAS IN EXISTENCE W.E.F. 1997 FOR PAYMENT OF COMMISSION @ 12.5%. HE FURTHER STRESSED THAT THERE WAS NO SPECIAL TERMS AND CONDITIONS AGREED UPON BETWEEN THE ASSESSEE AND KME AND TILL TODAY THE ASSESSEE WAS PAYING COMMISSION TO THE SAID KME. OUR AND KME AND TILL TODAY THE ASSESSEE WAS PAYING COMMISSION TO THE SAID KME. OUR ATTENTION WAS DRAWN TO THE LIST OF COMPANIES AT PAGE 130 WHICH WERE OPERATING IN DIFFE RENT 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 M ERIT IN STATING THAT THIS IS THE FRONT END COMPANY. HE FURTHER STRESSED THAT HOW THE SAME COULD BE HELD TO BE A COLOURABLE DEVI C E SINCE THE SAME COMPANY WAS OPERATING ON BEHALF OF THE ASSESSEE FOR 5 - 7 YEARS ON SAME TERMS AND CONDITIONS. COMING TO THE STA ND 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 WA S BETWEEN THE ASSESSEE AND IRAQ. 2 9 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRING TO CONTENTIONS OF LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN REJOINDER ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 27 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 T HAT THE SAID COMMISSION WAS PAID EARLIER. 30 . COMING TO THE ALLEGED PAYMENT OF ASSF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER FURTHER POINTED OUT THAT VCR ONLY TALKS OF PAYMENT OF ONE YEAR I.E. ASSESSMENT YEAR 2002 - 03 AND DOES NOT SAY ACTUALLY PAID. HE FURTHER STATED THAT THE BASIS FOR ALLEGATION WAS SOME INCOMPLETE FINANCIAL DATA WHICH WAS NOT CONFRONTED TO THE ASSESSEE AND HENCE THE SAME CANNOT BE RELIED ON. HE STRESSED THAT IN THE ABSENCE OF ANY EVIDENCE ON RECORD THAT TH E ASSESSEE HAS MADE THE AFORESAID PAYMENTS THE PROVISIONS OF SECTION 69C OF THE ACT COULD NOT BE APPLIED. HE FURTHER STRESSED THAT IT MAY BE PUT ON RECORD THAT THERE WERE NO DEALINGS BETWEEN THE ASSESSEE AND ANY OF THE BANKS WHICH ARE MENTIONED IN VCR. COMING TO THE RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN HERSH W. CHADHA VS. DDIT (SUPRA) HE POINTED REPRESENTATIVE FOR THE REVENUE IN HERSH W. CHADHA VS. DDIT (SUPRA) HE POINTED OUT THAT THE SAID ADDITION W AS UNDER SECTION 69A OF THE ACT AND THE REPORT WAS NOT CHALLENGED AND HENCE THE ADDITI ON. ANOTHER DISTINGUISHABLE FACTOR WAS THAT SAB REPORT WAS PREPARED AT THE REQUEST OF GOVERNMENT OF INDIA AND THE SAME WAS ACCEPTED. HOWEVER THERE WAS NO REQUEST BY THE GOVERNMENT OF INDIA FOR VCR AND THE SAID REPORT HAS NOT BEEN ACCEPTED AND THEREAFTER PATHAK COMMITTEE HAD BEEN FORMED. HE FURTHER POINTED OUT THAT THE EVIDENCE COLLECTED UNDER VCR WAS NOT UNDER DUE PROCESS OF LAW AND THE SAME WAS NOT CONFRONTED TO THE ASSESSEE AND IN VIEW OF THIS BACKGROUND THE PROPOSITION LAID DOWN IN HERSH W. CHADHA V S. DDIT (SUPRA) WAS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY KOLKATA BENCH OF TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (2012) 17 ITR 239 AND DEL HI BENCH OF TRIBUNAL IN ACIT VS. COSMOS INTERNATIONAL NEW DELHI IN ITA NO.4138/DEL./2011 & ORS. COMING TO THE ANOTHER RELIANCE PLACED UPON BY THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 28 LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE RATIO LAID DOWN IN M/S. CIPLA VS. ACIT (SUPRA) H E POINTED OUT THAT FACTUAL ASPECTS ARE DIFFERENT IN THE CASE OF M/S. CIPLA VS. ACIT (SUPRA) THERE WAS NO DENIAL BY M/S. CIPLA THAT ASSF HAS NOT OF M/S. CIPLA VS. ACIT (SUPRA) THERE WAS NO DENIAL BY M/S. CIPLA THAT ASSF HAS NOT BEEN PAID WHEREAS IN ASSESSEES CASE DENIAL WAS FROM DAY ONE. FURTHER REFERRING TO THE DECISION OF MUMBAI B ENCH OF TRIBUNAL IN M/S. SUMO INTERNATIONAL PVT. LTD. VS. DCIT IN ITA NOS.5293 & 1345/MUM/2009 RELATING TO ASSESSMENT YEAR 2002 - 03 ORDER DATED 20.05.2011 HE POINTED OUT THAT FACTS WERE DISTINGUISHABLE. HE CONCLUDED BY SAYING THAT THE PROVISIONS OF SECTI ON 69C OF THE ACT ARE NOT ATTRACTED. ITA NO S .1524 TO 1526 /PN/2011 ASSESSMENT YEARS 2002 - 03 TO 2004 - 05 MATHER & PLATT PUMPS LIMITED 31. THE ASSESSEE IN ITA NO S .1524 TO 1526 /PN/2011 HAS RAISED THE FOLLOWING COMMON GROUNDS OF APPEAL : - 1. THE L EARNED CIT (A) ERRED IN F ACTS AND IN LAW IN HOLDING THAT THE REOPENING OF ASSESSMENT WAS VALID . HE FAILED TO APPRECIATE THE CONTENTIONS AND ASSESSMENT WAS VALID . HE FAILED TO APPRECIATE THE CONTENTIONS AND ARGUMENTS AD V ANCED BY THE ASSESSEE . 2. THE LEARNED CIT(A) ERRED IN FACTS AND IN LAW IN UPHOLDING THE VALIDITY OF THE ASSESSMEN T 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 W ITHOUT 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 RS.6 21 44 550/ - U/S 69C OF THE ACT MADE BY ASSESSING OFFICER BY SOLELY RS.6 21 44 550/ - U/S 69C OF THE ACT MADE BY ASSESSING OFFICER BY SOLELY RELYING ON THE OBSERVATIONS IN THE VOLCKER REPORT WHICH REPORT ITSELF IS BASED ON SURMISES CONJECTURES AND GUESSWORK. 4. THE LEARNED C IT(A) ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THE SCHEME AND REQUIREMENTS OF SECTION 69C AND THE CONCEPT OF 'UNEXPLAINED EXPENDITURE ' ENVISAGED UNDER SECTION 69C. HE FAILED TO APPRECIATE THAT THE ONUS OF PROVING SUCH EXPENDITURE IS ACTUALLY INCURRED IS ON THE DEPARTMENT AND THE MERE FACT THAT THE ASSESSES NAME APPEARS IN THE LIST MENTIONED I N THE VOLCKER REPORT IS NOT SUFFICIENT TO DISCHARGE THIS BURDEN ESPECIALLY WHEN THE VOLKER REPORT ITSELF IS BASED ON GUESS WORK. THE LEARNED CIT(A) FAILED TO APPR ECIATE THE ARGUMENTS AND CONTENTIONS ADVANCED BY THE ASSESSEE. 5. THE ASSESSEE CRAVES LEAVE TO ADD TO ALTER AND TO MODIFY ANY OF THE ABOVE GROUNDS OF APPEAL. GROUNDS OF APPEAL. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 29 3 2. NOW COMING TO THE NEXT APPEAL IN THE CASE OF MATHER & PLATT PUMPS LTD. THE LEARNED AUTHO RIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE FACTS OF SAID CASE ARE SAME AS IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. THE YEARS UNDER APPEAL ARE ASSESSMENT YEARS 2002 - 03 TO 2004 - 05. 33 . THE ASSESSING OFFICER WHILE COMPLETING ASSESSMENT PROC EEDINGS IN THE CASE OF MATHER & PLATT PUMPS LTD. HAD OBSERVED THAT DURING THE PREVIOUS YEAR ENDING 31.03.2002 THE ASSESSEE HAD MADE EXPORTS TO IRAQ UNDER UN OIL FOR FOOD PROGRAMME FOR SUPPLY OF PUMP SETS. AS A RESULT THEREOF THE GOODS WERE SHIFTED FOR TRANSPORTATION OF BY SEA AND ALSO INLAND TRANSPORTATION FROM PORT TO BUYERS WAREHOUSING IN BAGHDAD. THE CONTRACT VALUE WAS INCLUSIVE OF INLAND TRANSPORTATION FEES. THE TOTAL CONTRACT VALUE OF ALL THE CONTRACT AGREEMENTS WAS 56227029 IN FC WHICH CONVERTE D TO 62 14 45 496/ - IN INR. THE ASSESSEE WAS ASKED TO EXPLAIN ITS TRANSACTION WITH IG SINCE THE NAME OF ASSESSEE APPEARED IN VCR. IN THE SHOW CAUSE NOTICE THE ASSESSING OFFICER ALLEGED THAT WHERE THE CONTRACT WAS INCLUSIVE OF CAUSE NOTICE THE ASSESSING OFFICER ALLEGED THAT WHERE THE CONTRACT WAS INCLUSIVE OF INLAND TRANSPORTATION CHARG ES AND / OR AFTER SALES SERVICE CHARGES SINCE AS PER VCR KICKBACKS WERE TO THE TUNE OF 10% OF THE CONTRACT VALUE THEREFORE AN AMOUNT OF RS.7.66 CRORES ON CONTRACT VALUE OF RS.76.62 CRORES IN ASSESSMENT YEARS 2 0 02 - 03 TO 2004 - 05 NEEDS TO BE ADDED IN THE HANDS OF ASSESSEE. IN REPLY THE ASSESSEE POINTED OUT THAT VCR DOES NOT REFER TO THE ASSESSEE BUT REFERENCE TO CONCERN NAME MATHER & PLATT ENGINEERING CENTRE (UK). THE ASSESSEE HOWEVER PRODUCED CONTRACT 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 TH E ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 30 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 ASSESSEES ARGUMENT ABOUT NON - MENTION OF ANY AMOUNT UNDER THE HEAD INLAND TRANS PORTATION FEES AND UNDER THE HEAD A SSF WERE CONSIDERED BUT SINCE CONTRACT EXECUTED BY THE ASSESSEE WAS ONE OF THE TAINTED CONTRACTS DETECTED BY VCR THOUGH THE AMOUNT WAS MENTIONED IN TOTAL THERE WAS REMARK WITH SYMBOL WHICH INDICATED THAT INLAND TRANS PORTATION FEES WERE REQUIRED TO BE PAID BY THE ASSESSEE BUT SPECIFIC INFORMATION WAS NOT AVAILABLE AND THE SAME APPLIED TO PAYMENT OF ASSF ALSO. THE ASSESSEE FURTHER CONTENDED THAT THE SAID TABLE TALKS OF FIGURE OF PAID AFTER SALES SERVICE OF USD 3 34 144 WHICH WORKS TO RS.1.63 CRORES. THE FIRST OBJECTION OF ASSESSEE WAS THAT THERE WAS NO BASIS FOR SAID FIGURE AND NOTHING HAS BEEN MADE AVAILABLE. HOWEVER THE ASSESSING OFFICER DENIED THE NOTHING HAS BEEN MADE AVAILABLE. HOWEVER THE ASSESSING OFFICER DENIED THE CONTENTION OF ASSESSEE AS THE REPORT WAS PREPARED AFTER SCRUTINY OF ALL THE AVAILABLE DOCUMENTARY EVIDENCE IN IRAQ MINISTRY AND ENTERPRISES CONCERNED. THE ASSESSEE ALSO ALLEGED THAT WHERE THE CONTRACTS WERE ENTERED INTO AFTER APPROVAL BY THE UN AND ALL THE TRANSACTIONS WERE CARRIED OUT THROUGH BANKS NOMINATED BY UN ONLY THERE IS NO MERIT IN THE ALLEGATION OF ASSESSING OFFICER. IN REPLY THE ASSESSING OFFICER MENTIONED THAT THE BASIS FOR VCR WAS THAT DESPITE THE PR ECAUTIONS TAKEN BY UN CONTROLLED ESCROW ACCOUNT IRAQI AUTHORITIES DEVISED A MECHANISM FOR EARNING ILLICIT I NCOME. THE CONTENTION OF ASSESSEE THAT IT HAD NOT INCURRED ANY EXPENDITURE AND HAD NOT CLAIMED ANY EXPENDITURE IN THE RETURN OF INCOME AND HOW ANY AMOUNT COULD BE ADDED WAS ALSO BRUSHED AS IDE BY THE ASSESSING OFFICER SINCE THE DEBITING OF SAID AMOUNT TO P ROFIT & LOSS ACCOUNT WAS NOT MATERIAL AS KICKBACKS WERE PAID BEFORE THE GOODS ACTUALLY REACH IRAQ. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 31 34. THE NEXT PLEA OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE COPIES OF SAID DOCUMENTS SHOULD BE GIVEN AND ALSO THERE SHOULD BE AN OPPORTUNI TY TO CROSS - EXAMINE THE PERSONS. THE ASSESSING OFFICER POINTED OUT THAT IF THE REPORT WAS NOT FACTUALLY ACCURATE IT WAS OPEN TO THE COMPANIES CONCERNED TO INITIATE LEGAL ACTION AGAINST UNSC AND MR. VOLCKER BUT NO SUCH ACTION WAS TAKEN BY THE ASSESSEE COM PANY. FURTHER NONE OF THE INDIAN COMPANIES HAD RESPONDED TO THE FINDINGS OF VCR WHEN OPPORTUNITY WAS RIGHTLY AVAILABLE. WITHOUT PREJUDICE TO THE ABOVE THE ASSESSING OFFICER OBSERVED THAT VCR HAS IMMENSE EVIDENTIARY VALUE AND HENCE OPPORTUNITY TO CROSS - EXAMINE THE CONCERNED PERSONS AS REQUESTED BY THE ASSESSEE DOES NOT ARISE. REFERENCE IN THIS REGARD WAS MADE TO THE PROVISIONS OF INDIAN EVIDENCE ACT. THE ASSESSING OFFICER CONCLUDED BY HOLDING THAT AS PER VCR THE ASSESSEE WAS 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 T O HEAD ASSF OR ITF. KICKBACKS WERE PAID BEFORE THE GOODS WERE PERMITTED T O 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 CO NTRACTS 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 P ROFIT & 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 T HE PROFIT & LOSS ACCOUNT WAS NOT MATERIAL AS KICKBACKS WERE PAID BEFORE THE GOODS ACTUALLY REACHED IRAQ. THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE WAS ALSO NOT OF MUCH RELEVANCE AS ITF PROVIDED IN THE CONTRACT FAR EXCEEDED THE ACTUAL TRANSPORTATION COST WHICH WAS ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 32 DONE IN ORDER TO PERMIT THE CONTRACTORS TO RECOVER THE KICKBACKS PAID BY THEM. THEREFORE 10% OF CONTRACT VALUE WAS ADDED AS INCOME OF THE ASSESSEE UNDER SECTION 69C OF THE ACT RESULTING IN ADDITION OF RS. 6 21 44 550/ - . 3 5 . THE CIT(A) UP HELD THE ORDER OF ASSESSING OFFICER IN VIEW OF THE NAME OF ASSESSEE APPEARING IN VCR IN ANNEXURE AT TABLE 8 WHERE SPECIFIC AMOUNT OF ASSF PAYMENT AMOUNTING TO USD 3 34 144 WAS MENTIONED IN THE TABLE WHICH RELATES TO THE ASSESSEE. THE GROUNDS OF APPEAL R AISED BY THE ASSESSEE IN THIS REGARD WERE THUS DISMISSED. 3 6 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AFTER TAKING US THROUGH THE OBSERVATIONS OF ASSESSING OFFICER POINTED OUT THAT THE ASSESSING OFFICER DOES NOT TALK OF ANY MIDDLEMEN FOR T HE PAYMENT OF INLAND HANDLING CHARGES. HE STRESSED THAT SOME EXPENSES OF INLAND TRANSPORTATION CHARGES HAVE BEEN ALLOWED IN THE HANDS OF ASSESSEE. OUR ATTENTION WAS DRAWN TO THE ANNEXURE - 1 FILED BY THE IN THE HANDS OF ASSESSEE. OUR ATTENTION WAS DRAWN TO THE ANNEXURE - 1 FILED BY THE ASSESSEE WHICH EVIDENCES SURFACE TRANSPORTATION OF G OODS WHEREIN FREIGHT AMOUNT WAS PRE - PAID AND THE GOODS WERE TRANSPORTED TO UMM QASR PORT THEN BY TRUCKS TO CIF BAGHDAD . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT UNDER SECTION 69C OF THE ACT THE ONUS WAS HEAVILY ON THE DEPAR TMENT THAT THE EXPENSES HAD BEEN INCURRED. IN THE BACKGROUND WHERE THE VCR WAS NOT ACCEPTED BY THE GOVERNMENT OF INDIA AND PATHAK COMMITTEE WAS CONSTITUTED NO DOCUMENTS WERE CONFRONTED TO THE ASSESSEE ON WHICH VCR IS BASED AND HENCE NO ADDITION UNDER S ECTION 69C OF THE ACT WAS POSSIBLE. FURTHER HE POINTED OUT THAT THE ADDITION WAS MADE @ 10% OF TOTAL TURNOVER THOUGH VCR TALKS OF ASSF OF USD 3 34 000 AND INLAND TRANSPORTATION CHARGES OF USD 35 000 WHICH TOTALS TO USD 3 70 000 AND MAXIMUM ADDITION TO T HE EXTENT OF RS.1.85 CRORES COULD BE MADE IN THE HANDS OF ASSESSEE STRICTLY IN THE ALTERNATE . AN ALTERNATE PLEA RAISED BY THE ASSESSEE WAS ITS ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 33 LAST RESORT WHILE ARGUING THE PRESENT APPEAL. HE STRESSED THAT AFTER AUGUST 2000 NO ADDITION ON THIS ACCOUNT COULD BE MADE IN THE HANDS OF ASSESSEE. 3 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN REPLY REFERRED TO THE COMPILATION FILED BY THE DEPARTMENT. HE REFERRED TO THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE ASSESSING OFFICER WHICH IS P LACED AT PAGE 1 OF PAPER BOOK UNDER WHICH IN REPLY TO THE QUERY RAISED IS THE CONTRACT OF SUPPLY OF PAYMENTS WO R TH AS PER CONTRACT AGREEMENT TO REPUBLIC OF IRAQ INCLUSIVE OF INLAND TRANSPORTATION CHARGES AND / OR AFTER SALES SERVICE CHARGES? . THE REP LY 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 PA YMENTS 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 PAYMENTS MADE BY THE ASSESSEE FILED BEFORE THE ASSESSING OFFICER DATED 11.12.2009 PLACED AT PA GES 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 TRANSPORTATION BY ROAD TO BOMBAY AND BY SEA FROM BOMBAY TO THE SPECIFIED DESTINATIONS I N IRAQ IN TERMS OF THE CONTRACT. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE REFERRED TO THE SUBMISSIONS OF ASSESSEE THAT WHEN NO EXPENDITURE WAS INCURRED NO ADDITION COULD BE MADE. HOWEVER THE CONTENTION OF ASSESSING OFFICER THAT RS.7.66 C RORES NEEDS TO BE ADDED . REFER RING TO THE ANNUAL REPORT FILED BY THE ASSESSEE FOR THE YEAR ENDING 31.03.200 3 PART OF WHICH WAS PLACED AT PAGES 4 TO 8 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE DECLARATION WAS MADE IN ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 34 RE SPECT OF SITE EXPENSES WHICH INCLUDE THE AMOUNT PAID FOR ERECTION AND COMMISSIONING AND MAINT E NANCE. IT IS ALSO REPORTED THAT IN RESPECT OF SUPPLIES MADE TO IRAQ UNDER UN OIL FOR FOOD PROGRAMME PURSUANT TO VARIOUS AGREEMENTS FOR SUPPLY OF EQUIPMENT WAS THAT THE OBLIGATION FOR GUARANTEED REPAIRS AND MAINTENANCE DURING THE STIPULATED PERIOD. THE ASSESSEE VIDE CLAUSE 10(C) ALSO ACKNOWLEDGED THAT THE SALES INCLUDED EXPORT TO IRAQ UNDER THE SAID PROGRAMME. THE CONTENTION OF LEARNED DEPARTMENTAL REPRESENTAT IVE FOR THE REVENUE IN THIS REGARD WAS THAT THOUGH THE ASSESSEE BEFORE THE ASSESSING OFFICER SAYS THAT NO EXPENSES WERE INCURRED AGAINST EXPORTS BUT IN THE AUDIT REPORT HE HAD REPORTED THAT EXPENSES WERE INCURRED AND BOOKED. REFERRING TO THE NOTES TO ACC OUNTS FOR THE YEAR ENDING 31.03.2003 PLACED AT PAGES 9 TO 15 OF PAPER BOOK AT PAGE 11 REFERENCE WAS MADE TO CLAUSE 9 WHEREIN ALSO IT WAS REPORTED THAT ERECTION COMMISSIONING AND MAINTENANCE CHARGES PAID OR PAYABLE TO FOREIGN PARTY FOR ENSURING REPAIRS / MAINTENANCE FOR PERIOD OF ONE YEAR IN RESPECT OF SUPPLIES MADE TO IRAQ UNDER THE OIL FOR FOOD PROGRAMME WAS WITHIN AN OBLIGATION FOR GUARANTEED IRAQ UNDER THE OIL FOR FOOD PROGRAMME WAS WITHIN AN OBLIGATION FOR GUARANTEED REPAIRS AND MAINTENANCE DURING THE STIPULATED PERIOD. HE STRESSED THAT SIMILAR REPORTING WAS MADE IN THE ANNU AL REPORT FOR THE YEAR ENDING 31.03.2002 AND 31.03.2003 BY THE ASSESSEE. FURTHER OUR ATTENTION WAS DRAWN TO THE APPELLATE ORDER IN THE CASE OF MATHER & PLATT PUMPS LTD. RELATING TO ASSESSMENT YEAR 2005 - 06 WHEREIN THE ASSESSEE HAD EXPLAINED THE APPOINTME NT OF LIAISON ING AGENCY WHICH WAS I.E. MR. KHEDDAR AL SAADI BAGHDAD IRAQ IN RESPECT OF SUPPLY OF 100 PUMPS TO IG AND THE SERVICES WERE ENGAGED IN ORDER TO FACILITATE THE CLEARANCE OF ALL DOCUMENTS FOR EARLY RELEASE OF PAYMENTS AND TO MAKE EFFORTS IN TH IS REGARD. THE CLAIM 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 RS.25.16 CRORES IN THREE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 35 YEARS COMMISSION PAYABLE @ 12.5% OF AMOUNT REALIZED TOTALING RS.1.94 CRORES AND FOREIGN EXCH ANGE PAID OF RS.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 SHO WN UNDER THE HEAD ERECTION AND COMMISSIONING BY THE SUPPLIER. THE SAID PAYMENT WAS MADE TO FRONT CONCERN OF IG WHO W ERE BASED IN IRAQ JORDAN AND SYRIA WHO IN TURN RETAINED 1% AND BALANCE WAS PASSED ON TO THE IG. THE LEARNED DEPARTMENTAL REPRESENTATI VE 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 BOOKED THE EXPENSES UNDER THE HEAD ERECTION AND COMMISSIONING EXPENSES WH ICH WAS PAYMENT TO FOREIGN AGENT. HOWEVER THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS CLAIMED THAT NO PAYMENT WAS MADE TO FOREIGN AGENT HENCE THERE IS NO LIABILITY TO TDS ALTHOUGH THE ASSESSEE HAD MADE PAYMENT TO FOREIGN AGENT AND AS PER TH E CHART AT PAGE 32 OF THE PAPER BOOK THE PAYMENTS TO FOREIGN AGENT AND AS PER TH E CHART AT PAGE 32 OF THE PAPER BOOK THE PAYMENTS WERE MADE EVEN BEFORE FOREIGN EXCHANGE AGAINST SALE WAS REALIZED WHICH IN TURN ESTABLISHES THE CASE OF REVENUE OF PAYING KICKBACKS. OUR ATTENTION WAS DRAWN TO THE ORDER OF ASSESSING OFFICER AT PAGE 13 WHEREIN IT CLEARLY STATED THAT THE ADDITION HAD TO BE MADE UNDER SECTION 69C OF THE ACT AND EVEN IF THE PAYMENT WAS MADE THROUGH BOOKS OF ACCOUNT BUT THE SAME IS NOT ALLOWABLE AS DEDUCTION. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURTHER P OINTED OUT THAT THE SAME NOTING IS FOUND IN THE ASSESSING OFFICERS ORDER IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. AT PAGE 8. HE THUS CONCLUDED BY SAYING THAT IF SECTION 69C WAS NOT APPLICABLE BUT STILL THE PAYMENT BY THE ASSESSEE CANNOT BE ALLOWED AS DEDUCTION. HE STRESSED THAT WHERE THE ASSESSING OFFICER HAD ASKED QUERIES DURING THE SCRUTINY ASSESSMENT BUT SINCE THE ASSESSEE HAD GIVEN VAGUE REPLY AND MISLEAD THE ASSESSING OFFICER HENCE THE CORRECT VIEW HAS TO BE TAKEN ON THE ISSUE. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 36 3 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINED POINTED OUT THAT FREIGHT CHARGES WERE ON ACCOUNT OF STEAMER CHARGES FROM PORT OF INDIA TO PORT IN IRAQ AND UPTO BAGHDAD BY ROAD. OUR ATTENTION WAS INVITED TO THE REPLY GIVEN PORT IN IRAQ AND UPTO BAGHDAD BY ROAD. OUR ATTENTION WAS INVITED TO THE REPLY GIVEN BEFORE THE ASSESSING OFFIC ER WHICH WAS REFERRED TO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN ITS PAPER BOOK WHEREIN THE ASSESSEE HAD ADMITTED THAT EXPENSES FOR TRANSPORTATION OF GOODS TO BAGHDAD. AT PAGE 11 IN THE NOTES TO ACCOUNTS THE ASSESSEE HAS EXPLAINED THE NATURE OF EXPENSES WHICH WERE DEBITED TO PROFIT & LOSS ACCOUNT. HE CONCLUDED BY SAYING THAT THE ASSESSING OFFICER IN CONCLUSION HAD APPLIED THE PROVISIONS OF SECTION 69C OF THE ACT AND WHERE OFFICER IN CONCLUSION HAD APPLIED THE PROVISIONS OF SECTION 69C OF THE ACT AND WHERE THE EXPENSES WERE BOOKED BY THE ASSESSEE AND NO ASSF WERE PA ID HENCE THE REPLY TO THE ASSESSING OFFICER AND CONSEQUENTLY NO DISALLOWANCE IS WARRANTED. 3 9 . SIMILAR ARGUMENTS WERE RAISED FOR ASSESSMENT YEARS 2003 - 04 AND 2004 - 05 IN THE CASE OF MATHER & PLATT PUMPS LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR TH E ASSESSEE POINTED OUT THAT THE FACTS AND ISSUE IN ASSESSMENT YEAR 2002 - 03 IN TH E ASSESSEE POINTED OUT THAT THE 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 : - 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 ASSESS MENT. GROUND NO.2: A ) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW & ON FACTS IN UPHOLDING THE ADDITION OF RS.89 40 596/ - MADE BY THE 'ASSESSING OFFICER' ON THE BASIS OF 'VOLCKER COMMISSION REPORT'. HE FAILED TO APPRECIATE THE ISSUE IN PRO PER PERSPECTIVE. PRO PER PERSPECTIVE. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 37 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 T HE 'ASSESS EE' NEITHER ANY COPY OF THE PAPERS MENTIONED IN THE 'VOLCKER COMMISSION REPORT' NOR ANY OPPORTUNITY TO CROSS EXAMINE CONCERNED PERSON COMMISSION REPORT' NOR ANY OPPORTUNITY TO CROSS EXAMINE CONCERNED PERSON WAS PROVIDED TO ASSESSEE DESPITE EXPRESS REQUEST BY THE ASSESSEE IN THIS REGARD. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT THE PRINCIPLES OF NATURAL JUSTICE HAVE NOT BEEN VIOLATED IN THE INSTANT CASE. C ) IN PARTICULAR THE LEARNED CIT (APPEAL) ERRED IN FACTS AND IN LAW IN OBSERVING THAT I ) THAT THE ASSESSEE HAS NOT MADE PAYMENT BY WAY OF 'IN LAND TRANSPORT FEES' TO M/S. AL AZAR TRADING COMPANY FOR TRANSPORTATION CHARGES. II ) THAT THE SUMS MENTIONED IN THE 'VOLCKER REPORT' REPRESENTS ACTUAL PAYMENT - 'THE CIT (APPEALS) FAILED TO UNDERSTAND AND APPRECIATE THE CONTENTION - 'THE CIT (APPEALS) FAILED TO UNDERSTAND AND APPRECIATE THE CONTENTION SUBMISSIONS & ARGUMENTS MAD E BY THE ASSESSEE IN THIS BEHALF. III ) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS A KICKBACK TO THE 'IRAQI GOVERNMENT' WITHOUT APPRECIATING THAT THE WHOLE EXPENDITURE WAS INCURRED ABOVE THE BOARD THROUGH THE PROPER BANKING CHANNEL AND WITH PROPER AUTHORIZATION FROM 'RESERVE BANK OF INDIA'. HE THUS FAILED IN APPLYING EXPLANATION TO SECTION 37 (1) IN THE INSTANT CASE. THE ENTIRE REASONING OF CIT (APPEALS) IS BASED ON WHOLLY IRRELEVANT FACTORS. IV ) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW & ON FACTS IN APPRECIATING CORRECT NATURE OF THE EXPENDITURE AND HAS PROCEEDED TO DECIDE THE ISSUE WITH A PREJUDICE MINDSET AND ALLOWED HIMSELF TO BE CONFUSED WITH THE NATURE OF EXPEN DITURE CLAIMED BY THE ASSESSEE. HE FAILED TO THE NATURE OF EXPEN DITURE CLAIMED BY THE ASSESSEE. HE FAILED TO APPRECIATE THAT THE EXPENDITURE IN QUESTION ARE COMMISSION EXPENSES LEGITIMATELY INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND ARE ALLOWABLE AS A DEDUCTIBLE EXPENDITURE. V ) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW & ON FACTS IN ALTERNATIVELY HOLDING THAT THE AMOUNTS ARE DISALLOWED U/S 40(A) OF THE ACT FOR NON DEDUCTION OF TAX AT SOURCE. HE FAILED TO APPRECIATE THAT THE PROVISIONS OF SECTION 195 ARE NOT A PPLICABLE IN THE INSTANT CASE AND NO TAX WAS DEDUCTIBLE AT ALL . THE A PPLICANT CRAVES LEAVE TO ADD ALTER AMEND OR MODIFY ANY OF THE GROUNDS OF APPEAL STATED ABOVE . 41 . COMING TO THE APPEAL IN THE CASE OF KIRLOSKAR BROTHERS LTD. BOTH THE LEARNED AUTH ORIZED REPRESENTATIVES POINTED OUT THAT THE FACTUAL ASPECTS IN THE CASE OF KIRLOSKAR BROTHERS LTD. WERE SLIGHTLY AT VARIANCE WHEREIN IN ASSESSMENT YEAR 2002 - 03 THERE WAS PAYMENT MADE TO CONCERN AZAR TRADING COMPANY DUBAI WHICH WAS NOT NAMED IN VCR. HO WEVER IN ASSESSMENT YEAR 2003 - 04 PAYMENT WAS MADE TO ALIA WHICH WAS NAMED AS FRONT COMPANY IN VCR. ALIA WHICH WAS NAMED AS FRONT COMPANY IN VCR. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 38 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 REOPENI NG 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 AUTHO RIZED 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. 4 3. CO MING 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 RS. 89 40 596/ - TO AZAR TRADING COMPANY 2002 - 03 THE ASSESSEE HAD PAID SUM OF RS. 89 40 596/ - TO AZAR TRADING COMPANY DUBAI ON ACCOUNT OF ITF. IN THE REASONS RECORDED FOR REOPENING THE ASSESSMENT THE ASSESSING OFFICER POINTED OUT THAT THE A SSESSEE WAS SUPPLYING PORTABLE CENTRIFUGAL PUMPS TO MINISTRY OF IRRIGATION GOVERNMENT OF IRAQ. REFERENCE WAS MADE TO VCR AND THE PAYMENTS OF ITF AND ASSF AND THE ASSESSMENT FOR BOTH THE YEARS UNDER APPEAL WERE REOPENED UNDER SECTION 147 OF THE ACT. TH OUGH THE ASSESSEE HAD RAISED GROUND OF APPEAL AGAINST REOPENING OF ASSESSMENT BUT DURING THE COURSE OF HEARING THE SAID GROUND OF APPEAL WAS NOT PRESSED AND THE SAME I S DISMISSED AS NOT PRESSED. 44 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSES SING OFFICER SHOW CAUSED THE ASSESSEE IN RESPECT OF ABOVE SAID PAYMENTS BEING MADE IN ASSESSMENT YEARS 2002 - 03 AND 2003 - 04 . IN REPLY THE ASSESSEE AT THE OUTSET ASKED FOR THE COPY OF VCR AND THE RELEVANT DETAILS BASED ON WHICH THE SAID SHOW CAUSE NOTICE W AS ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 39 ISSUED TO THE ASSESSEE. WITH REGARD TO PAYMENT OF RS. 89 40 596/ - PAID TO AZ H AR TRADING COMPANY DUBAI THE ASSESSEE STRONGLY DENIED THE ALLEGATION AND POINTED OUT THAT DURING THE YEAR THE TOTAL REMITTANCES TO AL AZHAR TRADING ESTATE DUBAI WAS RS. 87 61 920/ - AND NOT SUM OF RS. 89 40 596/ - WHICH IS REFERRED TO HAVE BEEN PAID TO AZHAR TRADING COMPANY. THE ASSESSEE THUS POINTED OUT THAT THE DETAILS OF VCR WERE NECESSARY TO BE LOOKED INTO AND AN OPPORTUNITY TO CROSS - EXAMINE THE DETAILS AND CONTENTS OF VCR WAS ALSO ASKED FOR. THE ASSESSEE FURTHER STATED THAT IT HAD REMITTED RS. 87 61 920/ - TO AL AZHAR TRADING ESTATE DUBAI AND FURTHER RS. 1 78 676/ - TO KME THE DISTRIBUTOR . A S P ER THE AGREEMENT ENTERED INTO THE TOTAL AMOUNT THUS REMITTED WAS RS. 89 40 596/ - . THE NEXT PLEA OF THE ASSESSEE IN THIS REGARD WAS THAT THE CONTRACT WITH IG WAS FOR SUPPLY OF 1465 NUMBERS OF WATER PUMP SETS WITH ENGINES AND ACCESSORIES AND THE SAID CONTRACT WAS EXECUTED WITH THE HELP OF DISTRIBUTOR I.E. KME WITH WHOM THEY HAD BUSINES S TRANSACTIONS SINCE 1 994 . REFERENCE WAS MADE TO THE DISTRIBUTION AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND KME AND THE ASSESSEE ALSO POINTED OUT THE INCREASE IN SALES AFTER ASSESSEE AND KME AND THE ASSESSEE ALSO POINTED OUT THE INCREASE IN SALES AFTER APPOINTING KME AS DISTRIBUTOR. THE REMUNERATION WAS FIXED @ 12.5%. THE AS SESSEE FURTHER EXPLAINED THAT THE SALES PROCEEDS WERE PAID THROUGH LETTER OF CREDI T OPENED BY UN AUTHORITIES FAVOURING THE ASSESSEE AND NOT BY WAY OF ISSUE OF PETROL COUPONS AS DONE IN VARIOUS OTHER CASES. FURTHER EXPLANATION WAS GIVEN REGARDING THE REMI TTANCES 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 AS SESSMENT 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 EAS T COUNTRIES. FURTHER THE ASSESSING OFFICER OBSERVED THAT IT H A D TO BE NOTED THAT THE GOODS WERE SUPPLIED TO IG UNDER THE OIL FOR FOOD PROGRAMME ADMINISTERED BY UN AS HUMANITARIAN ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 40 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 HUMANITARIAN GOODS SELLERS ILLEGAL OIL CHARGES OR KICKBACKS THROUGH VARIETY OF DEVI C ES. THE KICK BACKS WERE PAID BY INFLATED CONTRACT VALUES. HOWEVER THE ASSESSING OFFICER OBSERVED THAT IN THE CASE OF ASSESSEE KICKBACKS WERE GIVEN AS BROKERAGE AND REMUNERATION THROUGH AZHAR TRADING COMPANY. THE ASSESSING OFFICER FURTHER OBSERVED THAT JUST BECAUSE THE REMITTANCES WERE THROUGH OFFICIAL CHANNELS AFTER TAKING STATUTORY APPROVALS DOES NOT MEAN THAT THE PAYMENTS WERE LEGITIMATE. FURTHER REFERENCE WAS MADE TO THE EXPLANATION UNDER SECTION 37(1) OF THE ACT WHEREIN IT IS PROVIDED THAT ANY EXPENDITURE INC URRED BY ANY ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO ANY PURPOSE WHICH IS AN OFFENCE WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO BE INCURRED FOR THE PURPOSE OF BUSINESS AND NO DEDUCTION IS TO BE ALLOWED. APPLYING THE SAID PROVISIONS THE ASSESSING OFFICER DISALLOWED DEDUCTI ON FOR SUM OF RS. 89 40 596/ - AS EXPENDITURE COVERED EXPLANATION TO SECTION 37(1) OF THE ACT . 45 . THE CIT(A) TOOK NOTE OF THE BACKGROUND OF OIL FOR FOOD PROGRAMME OF UN AND FINDINGS OF VCR AND OBSERVED THAT THE ASSESSEE WAS ONE OF THE COMPANIES WHICH HAD E NTERED INTO TRANSACTIONS WITH IG UNDER OIL FOR FOOD PROGRAMME FOR SUPPLY OF HUMANITARIAN GOODS IN THE FORM OF WATER PUMPS ETC. THE IRAQ REGIME IN MID 1999 STARTED CHARGING INLAND TRANSPORTATION FEES FROM PARTICIPATING CONTRACTORS WHICH WERE NOT AP PROVED BY THE UN AND THEY HAVE EITHER PAID TO THE IRAQ CONTROLLED BANK ACCOUNTS OR TO THE CONCERNED COMPAN IES OUTSIDE IRAQ. ACCORDING TO THE VCR NOT ONLY THESE PAYMENTS WERE NOT AUTHORIZED UNDER THE PROGRAMME BUT ALSO FAR EXCEEDED ACTUAL TRANSPORTATION COSTS. BY MID 2000 IG STARTED THE BROADER POLICY TO ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 41 IMPOSE 10% OF KICKBACKS ON ALL HUMANITARIAN CONTRACTS WHICH WERE TERMED AS ASSF. THIS WAS IN ADDITION TO THE REQUIREMENT OF CONTRACTORS TO PAY ITF. THE CONTRACT PRICE S IN SUCH CASES WERE INFLATED BY A SET PE RCENTAGE TO ENABLE THE CONTRACTORS TO DRAW THE AMOUNT FROM ESCROW AND PAY TO THE IRAQ REGIME. THE CIT(A) NOTED THAT CHAPTER III OF VCR DISCUSSED THE HUMANITARIAN GOODS TRANSACTIONS AND THE ILLICIT PAYMENTS MADE TO IG UNDER SUCH TRANSACTIONS. UNDER THE SA ID PROGRAMME KICKBACKS WERE PAID BY COMPANIES WHICH WERE SELECTED TO RECEIVE THE CONTRACTS FOR SUPPLY OF HUMANITARIAN GOODS UNDER THE PROGRAMME TO IRAQ. AS PER THE VCR THE ASSESSEE WAS ONE SUCH COMPANY INVOLVED IN SUPPLY OF HUMANITARIAN GOODS TO IRAQ AN D ALSO 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 ITF THE PAYMENTS WERE MADE DIRECTLY TO IRAQ BY SEVERAL MEANS AND OUTSIDE THE PROGRAMMES AUTHORIZED ESCROW ACCOUNT. THE CIT(A) THEREAFTER REFE RRED 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 ILLI CIT 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 NATIONS CHARTER TO IMPOSE ECONOMIC SANCTIONS WHEREVER NECESSARY TO MAINTA IN AND RESTORE INTERNATIONAL PEACE AND SECURITY. THE CIT(A) THEN REFERRED TO SUM OF RS. 87 61 920/ - PAID TO M/S. AL AZHAR TRADING CO. AND RS.1 78 676/ - TO KME FROM JULY 2001 TO SEPTEMBER 2001 BY WAY ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 42 OF REMITTANCES FROM BANK OF INDIA PUNE TOWARDS ALLEGED INLAND TRANSPORTATION FEES AND SERVICES RENDERED. THE CONTENTION OF ASSESSEE BEFORE THE CIT(A) IN THIS REGARD WAS THAT IN THE MAIN BODY OF VCR THERE WAS NO DIRECT OR INDIRECT REFERENCE TO OR MENTION OF THE NAME OF ASSESSEE AND AMOUNTS WERE PAID FOR LEGI TIMATE BUSINESS EXPENSES. THIS CONTENTION OF THE ASSESSEE WAS REJECTED BY CIT(A) SINCE IN THE ANNEXURE WHICH WAS TO BE READ AS PART AND PARCEL OF REPORT REFERRED TO AT PAGE 251 OF CHAPTER 3 OF THE REPORT T HE NAME OF ASSESSEE WAS CLEARLY MENTIONED IN TAB LES 7 AND 8 OF THE REPORT. THE SAID COPY WAS ENCLOSED AS ANNEXURE TO THE APPELLATE ORDER BY THE CIT(A). IN THE TABLE 7 IT IS CLEARLY MENTIONED IN THE CASE OF ASSF THE AMOUNT REPRESENTS ACTUAL PAYMENT AND NOT PROJECTED PAYMENTS. IN THE SAME TABLE IN T HE CASE OF ITF IT IS STATED THAT THE AMOUNT REPRESENTS CONTRACT WHERE ITF WAS REQUIRED BUT NO SPECIFIC INFORMATION WAS AVAILABLE. THE CIT(A) HELD THAT THUS THE CONTRACT AMOUNT AND SPECIFIC AMOUNTS PAID OR REQUIRED TO BE PAID BY WAY OF INLAND TRANSPORTAT ION FEES OR ASSF ARE CLEARLY STATED IN THE TABLE ANNEXED TO THE REPORT AND THEREFORE THE CONTENTION OF THE APPELLANT THAT THE NAME OF THE APPELLANT APPEARS THEREFORE THE CONTENTION OF THE APPELLANT THAT THE NAME OF THE APPELLANT APPEARS ONLY IN THE TABLE AND NOT IN THE MAIN REPORT IS OF NO RELEVANCE. MOREOVER THE DETAILS FILED BY TH E APPELLANT ALSO INDICATE THAT THE AMOUNT WAS ACTUALLY PAID TOWARDS ALLEGED INLAND TRANSPORTATION FEES TO AN ENTITY IN DUBAI. 46 . COMING TO THE SECOND ASPECT OF THE ISSUE WHERE THE ASSESSEE CLAIMED THAT IT HAD PAID THE COMMISSION AT A FIXED PERCENTAGE O F 12.5% OF CONTRACT AMOUNT THE CIT(A) OBSERVED THAT THE EXPENDITURE BEING REIMBURSED AT A FIXED PERCENTAGE AND NOT ON ACTUAL BASIS SUPPORTS THE CASE OF REVENUE. ANOTHER ISSUE RAISED BY THE ASSESSEE WAS THAT THE AMOUNT WAS REMITTED TO AL AZHAR TRADING CO. IN LINE WITH DISTRIBUTION AGREEMENT ENTERED INTO BY THE ASSESSEE WITH KME AND THE COMMUNICATION RECEIVED FROM KME DATED 02.01.2002 WHEREIN SUCH REMITTANCES WERE AUTHORIZED BY THE GOVERNMENT OF INDIA UNDER FEMA . THE ASSESSEE CLAIMED THAT THE AMOUNT WAS R EMITTED THROUGH NORMAL BANKING CHANNELS FOR SERVICES ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 43 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 A ZHAR 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 SERV ICES 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 TRANS PORTATION 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 REN DERED 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 0 2.01.2002 BUT WHICH MAKES REFERENCE TO AGREEMENT OF MARCH 2001 AND APRIL 0 2.01.2002 BUT WHICH MAKES REFERENCE TO AGREEMENT OF MARCH 2001 AND APRIL 20 03. THE CIT(A) THUS CONCLUDED BY HOLDING THAT IT WAS NOT CLEAR AS TO HOW THE SUBSEQUENT DATE AGREEMENT APRIL 2003 WAS REFERRED IN LETTER DATED 02.01.2002 WHICH CLEARLY SHOWS THAT THE SAID LETTER WAS ANTEDATED AND EVIDENCE WAS CREATED TO JUSTIFY THE PAY MENT TO ALLEGED SERVICES. THE CIT(A) IN THIS REGARD OBSERVED THAT THE LETTER ITSELF CLEARLY ESTABLISHES THAT THE AMOUNT PAID WAS ONLY FOR KICKBACKS TO IG AND NOT ACTUAL TRANSPORTATION FEES OR SERVICE CHARGES. ANOTHER ASPECT NOTED BY THE CIT(A) WAS THAT T HE IMPUGNED PAYMENTS WERE DIRECTLY MADE TO AL AZHAR TRADING CO. AND THE ASSESSEE HAD NOT FURNISHED ANY EVIDENCE TO SHOW THAT KME WAS INVOLVED IN ANY MANNER IN SECURING CONTRACTS FROM IG AS PER THE UN RESOLUTION OR RENDERING PRE OR AFTER SALES SERVICES TO T HE IG OR ANY OTHER GOVERNMENT AGENCY IN IRAQ. THE CIT(A) IN THIS REGARD HELD THAT IF THE SERVICES WERE RENDERED BY K ME THE PAYMENT SHOULD HAVE BEEN MADE TO KME AND NOT AT A FIXED PERCENTAGE OF CONTRACT VALUE TO AN ENTITY IN DUBAI. THE CIT(A) ALSO RAISED AN ISSUE AS TO HOW THE SERVICE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 44 CHARGES CLAIMED TO HAVE PAID BY THE ASSESSEE UNDER THE UN OIL FOR FOOD PROGRAMME IN THE ABSENCE OF ANY EVIDENCE OF SERVICES HAVING BEEN PROVIDED BY THE SAID CONCERN . THE CLAIM OF ASSESSEE THAT THE SERVICES OF MIDDLEMEN WERE UTILIZED WAS HELD TO NOT TO STAND TO REASON. REFERRING TO THE VCR THE CIT(A) NOTED THAT KICKBACKS WERE PAID THROUGH FRONT COMPANIES IN MIDDLE EAST AND THE NOMENCLATURE WAS ITF AND ASSF . THE ASSESSEE HAVING NOT DISCHARGED THE ONUS OF PROVING THE GENUINEN ESS OF EXPENDITURE AND NATURE OF SERVICES RENDERED BY THE DISTRIBUTOR OR DUBAI AGENT THE CIT(A) HELD THAT THERE WAS NO JUSTIFICATION FOR THE PAYMENT OF ALLEGED SERVICE CHARGES. ON THE CONTRARY AS PER AN INDEPENDENT COMMITTEE OF UN THE FINDINGS WERE THA T ILLICIT PAYMENTS WERE BEING MADE IN THE GUISE OF ITF AND ASSF IN THE TRANSACTIONS RELATED TO OIL FOR FOOD PROGRAMME. WHERE THE ASSESSEE HAD FAILED TO FURNISH ANY EVIDENCE TO PROVE THAT THE SAID ENTITY HAD RENDERED SERVICES TO THE ASSESSEE AND JUST BECAU SE THE PAYMENTS WERE MADE THROUGH NORMAL BANKING CHANNELS TO THE DISTRIBUTOR THE CIT(A) HELD THAT IT COULD NOT BE SAID THAT THE PAYMENTS IN QUESTION WERE JUSTIFIED WHICH WERE OTHERWISE ILLEGAL NOT AS PER THAT THE PAYMENTS IN QUESTION WERE JUSTIFIED WHICH WERE OTHERWISE ILLEGAL NOT AS PER MANDATE OF RESOLUTION OF UNSC. 47. THE CIT(A) T HEN ADDRESSED THE NEXT CONTENTION OF ASSESSEE THAT THE PAYMENTS 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 A RE IMPOSED THEN THESE ARE BINDING ON UN MEMBERS STATES AND NON - COMPLIANCE WITH THE RESOLUTIONS AND DECISIONS OF SECURITY COUNCIL CONSTITUTE THE VI OLATION 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 45 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. RE FERENCE WAS MADE TO THE RATIO LAID DOWN BY THE HONBLE 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 DEDUCTION UNDER THE AC T. THEREAFTER THE CIT(A) REFERRED TO THE DECISION OF CALCUTTA BENCH OF TRIBUNAL IN TIL LTD. VS. ACIT (SUPRA) RELIED UPON BY THE ASSESSEE WHEREIN THE FINDING OF TRIBUNAL WAS THAT NEITHER THE ASSESSING OFFICER NOR COMMISSIONER HAD ACCESS TO VCR AND IT WAS ALSO NOT KNOWN WHETHER THE NAME OF ASSESSEE WAS MENTIONED IN THE REPORT AND IN THAT CONTEXT THE TRIBUNAL TOOK A VIEW THAT THE COMMISSION PAID COULD NOT BE DISALLOWED ON THE BASIS OF VCR. THE CIT(A) THUS HELD THAT WHEREAS IN THE CASE OF ASSESSEE IT WAS NOT IN DISPUTE THAT THE NAME OF ASSESSEE DOES FIGURE IN THE ANNEXURE TO VCR WHEREIN THE PAYMENT MADE BY ASSESSEE TO IG BY WAY OF ITF AND ASSF WAS CLEARLY MENTIONED AND THEREFORE THE FACTS OF THE PRESENT CASE WERE DIFFERENT FROM TIL LTD. THEN THE CIT(A) ADDRESSED THE GRIEVANCE OF ASSESSEE THAT DIFFERENT FROM TIL LTD. THEN THE CIT(A) ADDRESSED THE GRIEVANCE OF ASSESSEE THAT THE COPY OF REPORT BASED ON WHICH THE IMPUGNED ADDITION WAS MADE BY THE ASSESSING OFFICER WAS NOT MADE AVAILABLE TO THE ASSESSEE. THIS CONTENTION WAS ALSO REJECTED AS VCR WAS PLACED IN PUBLIC DOMAIN ON WEBSITE AND SECONDLY THE ASSESSEE HAD MADE DETAILED SUBMISSIONS ON VARIOUS ASPECTS OF THE MATTER INCLUDING TABLE 8 WHICH WAS AN ANNEXURE TO THE MAIN VCR. THE CIT(A) OBSERVED THAT ON THE ONE HAND THE ASSESSEE CLAIMS THAT THE COPY OF REPORT WAS NOT MADE AVAILABLE ON THE OTHER HAND THE ASSESSEE REFERS TO EVEN MINUTE DETAILS MENTIONED IN THE ANNEXURE TO THE REPORT WHERE NAME OF ASSESSEE WAS APPEARING ALONG WITH OTHER COMPANIES. THE CIT(A) IN THIS REGARD POINTED OUT THAT UNLESS THE ENTIRE REPORT WAS READ AND UNDERS TOOD FULLY BY THE ASSESSEE ALONG WITH ANNEXURE IT WAS NOT POSSIBLE FOR THE ASSESSEE TO SAY THAT ITS NAME WAS NOT MENTIONED IN THE MAIN REPORT BUT ONLY APPEARS IN THE ANNEXURE. THEREFORE THE CONTENTION OF ASSESSEE THAT VCR WAS NOT MADE AVAILABLE TO THE A SSESSEE WAS OF NO CONSEQUENCE AS THE ENTIRE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 46 REPORT WAS AVAILABLE IN THE PUBLIC DOMAIN AND THE ASSESSEE HA D MADE DETAILED COMMENTS IN THIS REGARD. 4 8 . THE SECOND PLEA OF THE ASSESSEE FOR ALLOWING CROSS - EXAMINATION OF PERSONS CONCERNED WAS ALSO HELD TO B E OF NO MERIT SINCE THE REPORT WAS BASED ON DATA IN PUBLIC DOMAIN. THE CIT(A) IN THIS REGARD FURTHER OBSERVED THAT THE PRINCIPLES OF NATURAL JUSTICE DO NOT REQUIRE THAT IN MATTERS LIKE UN COMMITTEE WHO HAD GIVEN THE REPORT SHOULD BE EXAMINED IN THE PRESEN CE OF ASSESSEE OR SHOULD BE ALLOWED TO BE CROSS - EXAMINED ON THE FINDINGS INCORPORATED IN THE REPORT. THE CIT(A) IN THIS REGARD REFERRED TO THE PRINCIPLES OF NATURAL JUSTICE AND POINTED OUT THAT THE RIGHT TO CROSS - EXAMINATION WAS PART OF PRO CEDURAL 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 VC R THEN THE INTEREST OF EQUITY AND NATURAL JUSTICE WAS SERVED. THE CIT(A) T HUS OBSERVED THAT NOTHING TURNS ON THE OMISSION OF ASSESSING OFFICER TO SUMMON THE MEMBERS OF VCR AND TO 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 DISPUT E 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 FAIL ED 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) WHE REIN SIMILAR DISALLOWANCE FOR PAYMENT OF COMMISSION WAS MADE S INCE THE ASSESSEE HAD FAILED TO DISCHARGE THE ONUS OF SHOWING AS TO WHAT SERVICES RENDERED BY THE AGENTS FOR WHICH THE PAYMENTS WERE MADE. FURTHER REFERENCE WAS MADE TO OTHER SISTER CONCERNS OF ASSESSEE WHEREIN COMMISSION PAYMENTS WERE DISALLOWED FOR WANT OF DISCHARGE OF ONUS TO PROVE THAT THE PAYEE HAD RENDERED ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 47 SERVICES TO THE ASSESSEE WHICH NECESSITATED THE PAYMENTS. THE CIT(A) THUS HELD THAT EVEN WHERE THERE WAS AN AGREEMENT BETWEEN THE PARTIES AND THE PAYMENTS WERE MADE BUT IT WAS STILL OPEN TO THE ASSESSING OFFICER TO CONSIDER THE RELEVANT FACTS AND DETAILS FOR DETERMINATION WHETHER THE COMMISSION SAID TO HAVE BEEN PAID TO AGENTS OR ANY PART THEREOF WAS DEDUCTIBLE UNDER SECTION 37 (1) O F THE ACT. THE CIT(A) FURTHER HELD THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS OTHERWISE NOT ALLOWABLE AS DEDUCTION UNDER SECTION 37 (1) OF THE ACT AS THE ASSESSEE HAD FAILED TO SUBSTANTIATE ITS CLAIM OF SERVICE CHARGES WITH NECESSARY EVIDENCE. WITHO UT PREJUDICE TO ALL THE ABOVE THE CIT(A) FURTHER HELD THAT THE PAYMENTS INVOLVED WERE ILLICIT PAYMENTS OR KICKBACKS TO IG WHEREIN THE ASSESSEE HAD NOT FURNISHED THE DETAILS OF TDS MADE ON SUCH REMITTANCES OR FILED ANY CERTIFICATE UNDER SECTION 195 OF THE ACT FROM THE CONCERNED ASSESSING OFFICER FOR NON - DEDUCTION OF TAX THE CIT(A) HELD THAT THE PAYMENTS WERE HIT BY SECTION 40(A)(I) OF THE ACT AND COULD NOT BE ALLOWED AS DEDUCTION. ACCORDINGLY THE ORDER OF ASSESSING OFFICER ON DISALLOWANCE OF RS. 89 49 59 6/ - WAS UPHELD. OF RS. 89 49 59 6/ - WAS UPHELD. ITA NO.690/PN/2010 ASSESSMENT YEAR : 2003 - 04 KIRLOSKAR BROTHERS LTD. 4 9 . IN ASSESSMENT YEAR 2003 - 04 THE ASSESSEE HAD CLAIMED THAT SUM OF RS.1 57 09 142/ - WAS PAID TO M/S. ALIA FOR TRANSPORTATION AND GENERAL TRADING COMPANY JORDAN (IN S HORT ALIA) IN THE FORM OF ASSF. THE SAID PAYMENTS WERE DEBITED TO THE PROFIT & LOSS ACCOUNT UNDER THE HEAD BROKERAGE AND REMUNERATION. SINCE THE SAID PAYMENTS TOWARDS AFTER SALES SERVICE FEES ACCORDING TO THE REPORT OF VCR WERE IN THE NATURE OF KIC KBACKS PAID TO IG THE ASSESSING OFFICER DISALLOWED THE SAME UNDER EXPLANATION TO SECTION 37(1) OF THE ACT. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 48 50 . SIMILAR ARGUMENTS RAISED BY THE ASSESSEE BEFORE THE CIT(A) AND SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE CIT(A) IN RESPECT OF SAID CLAIM OF ASSESSEE VIDE PARA 2.2.8 AT PAGE 16 ONWARDS. THE CIT(A) HAS NOTED THE FACTS RELATING TO ASSESSMENT YEAR 2003 - 04 WHEREIN SUM OF RS.1.57 CRORES WAS PAID TO ALIA JORDAN ON VARIOUS DATES IN NOVEMBER AND DECEMBER 2002 BY WAY OF REMITTANCES FROM BANK OF INDI A PUNE TOWARDS ALLEGED ASSF CHARGES. THE CONTENTION OF ASSESSEE THAT THE ASSESSEES 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 25 1 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 I NDICATED THAT THE AMOUNT WAS ASSESSEE THE CIT(A) OBSERVED THAT THE SAME ALSO I NDICATED 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 ADVI C E NOTES ISSU ED TO BANK OF INDIA PUNE FOR PAYMENT TOWARDS THE SAID CHARGES. THE COPY OF SAID ADVI C E DATED 26.11.2002 IS SCANNED AND REPRODUCED AT PAGE 17 OF THE APPELLATE ORDER. THE CIT(A) OBSERVED THAT THE ADVI C E NOTE ISSUED BY THE ASSESSEE TO THE BANKS PROVIDED BE YOND DOUBT THAT THE AMOUNT WAS PAID AS PER THE UNDERSTANDING WITH IRAQI AUTHORITIES AND THE SAME HAD TO BE PAID TO IRAQI AUTHORITIES BEING 10% OF INVOICE VALUE WHICH WAS NOTHING BUT ILLICIT PAYMENT BY WAY OF KICKBACKS. THE SECOND FEATURE NOTED BY THE CIT (A) WAS THAT THE SAME WAS PAID AT A FIXED PERCENTAGE I.E. 10% OF THE CONTRACT AMOUNT AND NOT ON THE BASIS OF ACTUAL EXPENDITURE IF ANY. AS PER VCR ALSO SUCH PAYMENTS WERE PAID OUTSIDE THE CONTRACT OF AGREEMENT WITH IRAQ REGIME AND TRANSPORTATION CHARGES OR SERVICE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 49 CHARGES WERE NOTHING BUT ILLICIT PAYMENT OF KICKBACKS. ANOTHER ARGUMENT OF ASSESSEE THAT THE AMOUNT WAS REMITTED TO ALIA JORDAN IN LINE WITH THE DISTRIBUTION AGREEMENT ENTERED INTO BY THE ASSESSEE WITH KME AND COMMUNICATION RECEIVED FROM KME DATED 10.11.2005 AND THE REMITTANCES WERE AUTHORIZED BY THE GOVERNMENT OF INDIA UNDER FEMA WAS ALSO LOOKED INTO BY THE CIT(A). THE ASSESSEE ALSO CLAIMED THAT THE AMOUNT WAS REMITTED THROUGH NORMAL BANKING CHANNELS FOR THE SERVICES RENDERED BY KME AND ALIA JORDAN. ANOTHER DISCREPANCY NOTED BY THE CIT(A) WAS THAT IN THE LETTER DATED 10.11.2002 OF KME THE AMOUNT WAS CLAIMED TO HAVE BEEN PAID TOWARDS TRANSPORT SERVICES FROM UMM QASER TO BAGHDAD BUT AS PER DECLARATION FILED UNDER FEMA AND BANK ADVISE NOTE THE PURPOSE OF PAYMENT WAS SAID TO BE SERVICE CHARGES WHICH WAS AT VARIANCE. FURTHER IF IT WAS TRANSPORT SERVICES RENDERED AS CLAIMED BY THE ASSESSEE THEN HOW C AN IT WAS PAID AT FIXED PERCENTAGE OF 10% OF THE CONTRACT VALUE. THE ASSESSEE HAD FAILED TO FURNISH ANY INVOICE FOR THE ALLEGED TRANSPORTATION CHARGES RAISED BY EITHER KME OR ALIA JORDAN. ANOTHER ASPECT NOTED BY THE CIT(A) WAS THAT AS PER THE SAID KME OR ALIA JORDAN. ANOTHER ASPECT NOTED BY THE CIT(A) WAS THAT AS PER THE SAID LETTER DATED 10.11.2002 IT WAS ONLY ON THE REMITTANCE OF ALLEGED SERVICE CHARGES AT 10% OF THE C ONTRACT VALUE THE KME WAS TO PROCESS THE CASE FURTHER AND TO CLEAR THE REMITTANCE FOR THE SUPPLIES THROUGH THE LETTER OF CREDIT. THIS AS PER THE CIT(A) ESTABLISHES THAT IT WAS ONLY KICKBACKS TO THE IG SINCE THE PAYMENT OF KICKBACKS WAS A PRE - CONDITION F OR PROCESSING THE REMITTANCES FOR SUPPLY OF HUMANITARIAN GOODS. SEVERAL OTHER IRREGULARITIES IN THE SAID TRANSACTION WERE TAKEN 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 UN SC. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 50 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 JORDA N 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 EXPENDITURE WAS INCURRED FOR SERVICES RENDERED BY KME. THE CIT(A) AS IN ASSESSMENT YEAR 2002 - 03 THEN DELIBERATED ON THE ISSUE OF ALLOWABILITY OF DEDUCTION UNDER SECTION 37 OF THE ACT AND HELD THAT THE SAME IS DEVOID OF MERIT AND EXPLANATION TO SECTION 37(1) OF THE ACT IS CLEARLY ATTRACTED. REFERENCE WAS MADE TO UN CHARTER AND SANCTIONS IMPOSED AND THE RATIO LAID DOWN BY THE HONBLE SUPREME UN CHARTER AND SANCTIONS IMPOSED AND THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF MADDI VENKATARAMAN & CO. (P) LTD. (SUPRA) AND THE DECISION OF CALCUTTA BENCH OF TRIBUNAL IN TIL LTD. VS. ACIT (SUPRA) AND IT WAS HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE DISALLOWANCE OF SUCH PAYMENTS UNDER THE PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE ACT. 52 . THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO VARIOUS OBSERVATIONS OF ASSESSING OFFICER IN ASSESSMENT YEAR 2002 - 03 AND POINTED OUT THAT VCR TALKS OF AGREEMENT OF AUGUST 2001. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT T HE ASSESSING OFFICER HAD APPLIED EXPLANATION (1) TO SECTION 37(1) OF THE ACT. HE FURTHER STATED THAT THE ASSESSING OFFICER HAD NOT ACCEPTED THE CONTENTION OF ASSESSEE THAT KME WAS HELPING THE ASSESSEE IN SECURING THE ORDERS IN MIDDLE EAST. HE FURTHER STR ESSED THAT THE PAYMENT TO ALI AZHAR TRADING CO. WAS NOT ON ACCOUNT OF INLAND TRANSPORTATION BUT SERVICE CHARGES ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 51 PAID AT THE BEHEST OF KME WITH WHOM THE ASSESSEE HAS AN AGREEMENT. THE NEXT CONTENTION RAISED BY HIM WAS THAT THE ASSESSING OFFICER ADMITS THAT KME REMAINS TO THE ASSESSEE SO WHETHER THE PAYMENT WAS MADE TO KME AND AL AZHAR TRADING CO. FOR SUCH SERVICES IT MA KES NO DIFFERENCE. THE TOTAL OUTGO UNDER THIS HEAD IS WITHIN LIMITS OF AGREED AMOUNT OF 12.5%. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THEREAFTER REFERRED TO THE OBSERVATIONS OF ORDER OF CIT(A) WITH SPECIAL REFERENCE TO PARA 2.3.10 ONWARDS . AT PAGE 62 T HE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE LETTER DATED 02.01.2002 WAS SCANNED WHICH MENTI ONS THE DATE OF APRIL 2003 WHICH WAS TYPING ERROR. THE AGREEMENT BETWEEN THE PARTIES WAS REFERRED TO AT PAGE 50 OF THE PAPER BOOK WHICH WAS MARCH 2001. IT WAS PUT TO THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE SAID AGREEMENT WAS F OR A PERIOD OF TWO YEARS AND WHAT HAPPENED THEREAFTER. OUR ATTENTION WAS DRAWN TO THE DEBIT ADVICE AND THE DETAILS OF COMMISSION PLACED AT PAGES 63 AND 64 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER STRESSED THAT THE CIT(A) HAD ENLARGED THE 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 HONBLE SUPREME COURT IN THE CASE OF MADDI VENKATARAMAN & CO. (P) LTD. (SUPRA). THE LEARNED AUTHORIZED REPR ESENTATIVE 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 REPRESENTA TIVE 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 C BDT 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 52 THE ASSESSEE REFERRED TO THE VCR AT PAGES 300 AND 302. IN THE SAID REPORT THAT THERE WAS NO MENTION OF AL AZHAR TRADING CO. AND IT WAS NEITHER MAIN NOR SECOND AR Y COMPANY CONSIDERED BY THE VCR. HOWE VER HE ADMITTED THAT THE NAME OF OTHER CONCERN ALIA IS MENTIONED AT PAGE 302 OF VCR. WITH RESPECT TO AL AZHAR TRADING CO. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID COMPANY WAS ESTABLISHED IN 1986 IN DUBAI AND WHICH WAS HAVING WIDE INTEREST AND SUCH ESTABLISHED COMPANY WOULD NOT INDULGE IN SUCH ACTIVITIES . HE FURTHER STRESSED THAT IT WAS NOT A TAINTED COMPANY AND THE PAYMENT MADE TO THEM COULD NOT BE SAID TO BE TAINTED. WITH REGARD TO ASSESSMENT IN ASSESSMENT YEAR 2003 - 04 THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE FACTS WERE IDENTICAL WHEREIN THE PAYMENT WAS MADE TO ALIA. HE STRESSED THAT THE BILL OF LADING WAS TO BAGHDAD HENCE GOODS WERE DELIVERED AT THE PLACE AGREED UPON. OUR ATTENTION WAS DRAWN TO THE BILL OF LADING AT PAGE 103 OF THE PAPER BOOK WHEREIN IT WAS CLEARLY MENTIONED THAT THE GOODS HAD TO BE DELIVERED AT BAGHDAD. HE FURTHER REFERRED TO PAGE 108 AND POINTED OUT THAT THE SAME REFLECTS THE SERVICE HE FURTHER REFERRED TO PAGE 108 AND POINTED OUT THAT THE SAME REFLECTS THE SERVICE CHARGE @ 10%. HE A LSO INVITED OUR ATTENTION TO THE BANK ADVICE WHEREIN THE AMOUNT HAD PAID TO THE BENEFICIARY AS PER COMMUNICATION PLACED AT PAGES 113 AND 117 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THEREAFTER PLACED RELIANCE ON THE RATI O LAID DOWN BY THE CALCUTTA BENCH OF TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) WHICH IN TURN HAS BEEN APPROVED BY THE HONBLE CALCUTTA HIGH COURT. FURTHER RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: - A) AIR PAC EXPORTS VS. ACIT (2014) 47 TAXMANN.COM 58 (MUMBAI - TRIB.) B) NSIL EXPORTS LTD. VS. DCIT ITA NOS.3050 TO 3052/MUM/2013 RELATING TO ASSESSMENT YEAR 2001 - 02 TO 2003 - 04 ORDER DATED 21.02.2014 C) DCIT VS. M/S. THE ANANDA BAG TEA CO. LTD. ITA NOS.1932 & 1945/KOL/2010 RELATING TO ASSESSMENT YEARS 2002 - 03 & 2003 - 04 ORDER DATED 13.01.2012 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 53 53 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD STRESSED THAT THERE WAS NO MERIT IN DISALLOWANCE MADE BY THE CIT(A) UNDER SECTION 37(1) OF THE ACT OR UNDER EXPLANA TION TO SECTION 37(1) OF THE ACT. 5 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND POINTED OUT THAT THE TERMS OF CONTRACT WERE IDENTICAL. HOWEVER IN THIS CASE INLAND TRANSPORT WAS THROUGH ALIA. IN THE ASSESSMENT YEAR 2002 - 03 KME DIRECT S 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 AL IA WAS PAID @ RATE OF COMMISSION WAS VARYING AND WHERE THE COMMISSION TO AL IA 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 REFERE NCE TO AGREEMENT OF APRIL 2003. WHEREAS THE SUBMISSIONS MADE BY THE ASSESSEE COPY OF WHICH IS PLACED AT PAGES 6 TO 11 TALKS OF PAYMENT TO AUTHORITY. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE RELIANCE PLACED O N DCIT VS . RAJRANI EXPORTS PVT. LTD. (SUPRA) BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE DEPARTMENT HAS TO ESTABLISH ITS CASE. HOWEVER IN THE PRESENT CASE THE FACTS WERE ESTABLISHED BY THE ASSESSING OFFICER AND HENCE THE SAID RATIO IS NOT APPLICABLE TO THE PRESENT FACTS. IN ANY CASE KME WAS THE SISTER CONCERN AND HENCE WAS CLEARLY AWARE OF WHAT IS HAPPENING. HE STRESSED THAT IT ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 54 WAS THE DUTY OF ASSESSEE TO DEMONSTRATE THAT CERTAIN SERVICES WERE RENDERED WHICH WERE NOT ILLEGAL BUT HE RE IN THE PRESENT CASE THE ASSESSEE HAS FAILED TO GIVE EVIDENCE OF SERVICES RENDERED BY AL AZHAR ALIA AND KME AND IN THE ABSENCE OF THE SAME NO DEDUCTION IS ALLOWABLE TO THE ASSESSEE. RELIANCE WAS PLACED ON THE RATIO LAID DOWN IN THE CASE OF KIRLOSKAR OIL ENGINES LTD . IN ITA NOS.1039 & 1040/PN/2000 RELATING TO ASSESSMENT YEARS 1995 - 96 & 1996 - 97 ORDER DATED 31.08.2006 WHEREIN COMMISSION PAID WAS DISALLOWED SINCE THE ASSESSEE HAS FAILED TO ESTABLISH THAT SERVICES HAD BEEN RENDERED. THE LEARNED DEPARTM ENTAL REPRESENTATIVE FOR THE REVENUE STRESSED THAT THERE IS NO MERIT IN VARIOUS RELIANCES PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SINCE THE FACTS OF THE PRESENT CASE WERE AT VARIANCE. IN THE CONTRACT BEFORE US THERE WAS ADMI SSION WHERE CONTRACT WAS INCLUSIVE OF TRANSPORTATION THEN NO FURTHER PAYMENT COULD BE ALLOWED AS DEDUCTION ON ACCOUNT OF TRANSPORTATION. 55 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED 55 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE COMMISSION PAID FOR P ERIOD FROM APRIL 2003 TO 2005 WAS 12.5% AND FOR EARLIER YEARS THE SAME HAD TO BE DECIDED ON CASE TO CASE BASIS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT NOTHING WAS PAID EXTRA WHERE COMMISSION AND EXPORT EXPENDITURE TOTALED 2 5%. HE FURTHER EXPLAINED THAT THE CONTRACTS INVOLVED WERE SAME I.E. TRANSPORTATION TO BAGHDAD WHICH HAD TO BE CARRIED OUT. REFERRING TO THE AGREEMENT OF APRIL 2001 THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SERVICE CHA RGES WERE PAID AND THE SAME WAS ALLOWABLE WHEREIN BANKS HAD RELIED ON LETTERS ISSUED FROM MIDDLE EAST. 56 . ON THE NEXT DATE OF HEARING SHORT SUBMISSIONS WERE FILED BY THE ASSESSEE . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURNISHED REPL Y TO THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 55 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 T HE 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. 5 8 . 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 I RAQ FOR SEVERAL ISSUE RAISED ARE THAT THE ASSESSEE HAD MADE CERTAIN SUPPLIES TO I RAQ FOR SEVERAL YEARS . AS A RESULT OF INVASION OF KUWAIT BY IRA Q CERTAIN SANCTIONS WERE IMPOSED ON THE IRAQI REGIME. HOWEVER BECAUSE OF WORSENING ECONOMIC AND HUMANITARIAN CONDITIONS IN IRAQ UN S C HAD APPROVED OIL FOR FOOD PROGRAAME ON 14.05.1995 . UNDER THE SAID PROGRAMME AGAINST THE IMPORT OF PETROLEUM PRODUCTS FROM IRAQ NO MONEY WAS TO BE PAID DIRECTLY TO THE IRAQI REGIME BUT THE SAME WAS TO BE DEPOSITED IN ESCROW ACCOUNT ESTABLISHED BY UN SECRETARY GENERAL. THERE W ERE ALLEGATIONS OF PAYMENTS OF KICKBACKS TO THE IG AND FOR VERIFYING THE SAME VOLCKER COMMITTEE WAS CONSTITUTED BY THE UN. AS PER THE REPORT PREPARED BY V OLCKER COMMITTEE IT WAS ALLEGED THAT THE PAYMENTS WERE MADE BY DIFFERENT ENTITIES PURCHASING PETROLEUM PRODUCTS FROM IRAQ IN THE FORM OF INLAND TRANSPORTATION FEES AND AFTER SALES SERVICES. SIN CE THE SAID PAYMENTS WERE NOT AUTHORIZED UNDER THE PROGRAMME AND ALSO BECAUSE OF THE FACT THAT INLAND TRANSPORTATION FEES FAR EXCEEDED THE ACTUAL TRANSPORTATION COSTS AND ALSO SINCE NO AFTER SALES SERVICES ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 56 WERE PROVIDED BY THE CONCERN S OR THE FRONT COMPANI ES WHO CHARGED ASSF THE FINDING OF VCR WAS THAT THE SAID PAYMENTS WERE IN THE FORM OF KICKBACKS TO THE IG. THE MODUS OPERANDI OF PAYMENT WAS THAT THE CONTRACT PRICES WERE INFLATED IN ORDER TO ENABLE THE CONTRACTORS TO DRAW THE REQUIRED AMOUNT FROM ESCRO W ACCOUNT. THE FRONT COMPANIES AFTER RETAINING 1% PASSED ON THE BALANCE PAYMENTS TO THE IG. THE VCR IN THIS REGARD PREPARED VOLUMINOUS REPORT ON ACCOUNT OF EXPORTS TO IRAQ UNDER THE OIL FOR FOOD PROGRAMME. THE KOLKATA BENCH OF TRIBUNAL IN THE CASE OF DC IT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) HAD NOTED THE WORKING OF THE SAID PROGRAMME AS UNDER: - 5 THE WORKING OF THIS PROGRAM CAN BE APPRECIATED FROM THE FOLLOWING DOCUMENT ON UN WEBSITE: OIL - FOR - FOOD HTTP://WWW.UN.ORG/DEPTS/OIP/BACKGROUND/INDEX.H TML ORIGINS: IN AUGUST 1990 THE SECURITY COUNCIL ADOPTED RESOLUTION 661 IMPOSING COMPREHENSIVE SANCTIONS ON IRAQ FOLLOWING THAT COUNTRYS INVASION OF KUWAIT. IN THE IMMEDIATE AFTERMATH OF THE GULF WAR IN 1991 THE SECRETARY - GENERAL DISPATCHED AN IMMEDIATE AFTERMATH OF THE GULF WAR IN 1991 THE SECRETARY - GENERAL DISPATCHED AN INTER - A GENCY MISSION TO ASSESS THE HUMANITARIAN NEEDS ARISING IN IRAQ AND KUWAIT. THE MISSION VISITED IRAQ FROM 10 TO 17 MARCH 1991 AND REPORTED THAT 'THE IRAQI PEOPLE MAY SOON FACE A FURTHER IMMINENT CATASTROPHE WHICH COULD INCLUDE EPIDEMIC AND FAMINE IF MASSI VE LIFE - SUPPORTING NEEDS ARE NOT 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 PEOP LE'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 NA TIONS 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 CONCERN ING 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 GOVER NMENT 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 FOOD ARRIVED IN MARCH 1997. FUNDING: UNTIL 20 MARCH 2003 WHEN WAR INTERVENED AND OIL EXPORTS UNDER T HE PROGRAMME ENDED THE OIL - FOR - FOOD PROGRAMME WAS FUNDED EXCLUSIVELY FROM THE PROCEEDS OF IRAQI OIL EXPORTS AUTHORISED BY THE SECURITY COUNCIL. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 57 IN THE INITIAL STAGES OF THE PROGRAMME IRAQ WAS PERMITTED TO SELL $2 BILLION WORTH OF OIL EVERY SIX MONTHS WITH TWO - THIRDS OF THAT AMOUNT TO BE USED TO MEET IRAQS HUMANITARIAN NEEDS. IN 1998 THE LIMIT ON THE LEVEL OF IRAQI OIL EXPORTS UNDER THE PROGRAMME WAS RAISED TO $5.26 BILLION EVERY SIX MONTHS AGAIN WITH TWO - THIRDS OF THE OIL PROCEEDS EARMARKED TO MEET THE HUMANITARIAN NEEDS OF THE IRAQI PEOPLE. IN DECEMBER 1999 THE CEILING ON IRAQI OIL EXPORTS UNDER THE PROGRAMME WAS REMOVED BY THE SECURITY COUNCIL. SEVENTY TWO PER CENT OF IRAQI OIL EXPORT PROCEEDS FUNDED THE HUMANITARIAN PROGRAMME OF WHICH 59% WAS EARMARKED FOR THE CONTRACTING OF SUPPLIES AND EQUIPMENT BY THE GOVERNMENT OF IRAQ FOR THE 15 CENTRAL AND SOUTHERN GOVERNORATES AND 13% FOR THE THREE NORTHERN GOVERNORATES WHERE THE UNITED NATIONS IMPLEMENTED THE PROGRAMME ON BEHALF OF THE GOVERNMENT OF I RAQ. THE BALANCE INCLUDED 25% FOR A COMPENSATION FUND FOR WAR REPARATION PAYMENTS; 2.2% FOR UNITED NATIONS ADMINISTRATIVE AND OPERATIONAL COSTS; AND 0.8% FOR THE WEAPONS INSPECTION PROGRAMME. MANAGEMENT: THE OFFICE OF THE IRAQ PROGRAMME IS HEADED BY THE EXECUTIVE DIRECTOR WHO IS RESPONSIBLE FOR THE OVERALL MANAGEMENT AND COORDINATION OF ALL UNITED NATIONS HUMANITARIAN ACTIVITIES IN IRAQ UNDER RESOLUTIONS 661 (1990) AND 986 (1995) AND THE PROCEDURES ESTABLISHED BY THE SECURITY COUNCIL AND ITS COMMITTEE SET UP BY RESOLUTION 661 (1990) AS WELL AS THE MEMORANDUM OF UNDERSTANDING BETWEEN THE UNITED NATIONS AND THE GOVERNMENT OF IRAQ (MAY 1996). MANDATE: THE OFFICE OF THE IRAQ PROGRAMME ADMINISTERS THE PROGRAMME AS AN OPERATION SEPARATE AND DISTINCT FROM ALL OTHER UNITED NATIONS ACTIVITIES WITHIN THE CONTEXT OF THE SANCTIONS REGIME WHICH FALL WITHIN THE PURVIEW OF UNMOVIC IAEA AND THE UNITED NATIONS COMPENSATION COMMISSION. COORDINATION: THE OFFICE OF THE HUMANITARIAN COORDINATOR IN IRAQ (UNOHCI) IS AN COORDINATION: THE OFFICE OF THE HUMANITARIAN COORDINATOR IN IRAQ (UNOHCI) IS AN INT EGRAL PART OF THE OFFICE OF THE IRAQ PROGRAMME (OIP). THE HUMANITARIAN 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 DELIVERE D 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 IMPLEMENTATI ON 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 SI NCE THE ADOPTION OF THAT RESOLUTION. OIL - FOR - FOOD PLUS: THE PROGRAMME AS OUTLINED IN THE LATEST REPORT OF THE SECRETARY - GENERAL WAS EXPANDED BY THE SECURITY COUNCIL BEYOND ITS INITIAL EMPHASIS ON FOOD AND MEDICINES TO INCLUDE INFRASTRUCTURE REHABILITAT ION AND 24 SECTORS: FOOD FOOD - HANDLING HEALTH NUTRITION ELECTRICITY AGRICULTURE AND IRRIGATION EDUCATION TRANSPORT AND TELECOMMUNICATIONS WATER AND SANITATION HOUSING SETTLEMENT REHABILITATION (INTERNALLY DISPLACED PERSONS - IDPS) MINE ACTION S PECIAL ALLOCATION FOR ESPECIALLY VULNERABLE GROUPS AND OIL INDUSTRY SPARE PARTS AND EQUIPMENT. THE GOVERNMENT OF ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 58 IRAQ INTRODUCED THE FOLLOWING 10 NEW SECTORS IN JUNE 2002: CONSTRUCTION INDUSTRY LABOUR AND SOCIAL AFFAIRS BOARD OF YOUTH AND SPORTS INFOR MATION CULTURE RELIGIOUS AFFAIRS JUSTICE FINANCE AND CENTRAL BANK OF IRAQ. PRE - WAR AND POST - WAR DEVELOPMENTS (2003): ON 17 MARCH 2003 THE UNITED NATIONS SECRETARY - GENERAL ANNOUNCED THAT IN VIEW OF WARNINGS RECEIVED FROM THE GOVERNMENTS OF THE UNITE D KINGDOM AND THE UNITED STATES REGARDING THE PROSPECT OF WAR AND THE CONTINUED SAFETY AND SECURITY OF UN PERSONNEL PRESENT IN THE TERRITORY OF IRAQ HE WAS NO LONGER IN A POSITION TO GUARANTEE THEIR SAFETY AND SECURITY. ALL REMAINING UN INTERNATIONAL STA FF IN IRAQ WERE EVACUATED ON 18 MARCH 2003 AND THE PRESIDENT OF THE SECURITY COUNCIL ASKED THE SECRETARY GENERAL TO SUBMIT PROPOSALS TO ADJUST THE MANDATE OF THE OIL - FOR - FOOD PROGRAMME SO THAT IT WOULD HAVE FLEXIBILITY TO MEET NEW HUMANITARIAN CHALLENGES P RESENTED BY THE PROSPECT OF WAR IN IRAQ. ON 19 MARCH 2003 THE WAR IN IRAQ BEGAN WITH THE BOMBING OF BAGHDAD AND ON 20 MARCH 2003 THE SECRETARY GENERAL PLEDGED TO DO HIS UTMOST TO ENSURE THAT THE UN ROSE TO THE CHALLENGE OF SHIELDING THE CIVILIAN POPULA TION 'FROM THE GRIM CONSEQUENCES OF WAR.' A RESOLUTION (1472) WAS ADOPTED UNANIMOUSLY BY THE SECURITY COUNCIL ON 28 MARCH 2003 ADJUSTING THE OIL - FOR - FOOD PROGRAMME AND GIVING THE SECRETARY - GENERAL AUTHORITY TO FACILITATE THE DELIVERY AND RECEIPT OF GOODS CONTRACTED BY THE GOVERNMENT OF IRAQ FOR THE HUMANITARIAN NEEDS OF ITS PEOPLE. ON 24 APRIL 2003 THOSE PROVISIONS WERE EXTENDED TO 3 JUNE. THE EXTENSION UNDER RESOLUTION 1476 (2003) GAVE THE OFFICE OF THE IRAQ PROGRAMME AND UN AGENCIES VALUABLE TIME TO ID ENTIFY AND SHIP ADDITIONAL GOODS AND SUPPLIES. THE SECURITY COUNCIL LIFTED CIVILIAN SANCTIONS 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 W ORK WITH THE OCCUPYING FORCES IN REBUILDING IRAQ; OPENED THE WAY FOR THE RESUMPTION OF OIL EXPORTS WITH REVENUES DEPOSITED IN A 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 M ONTHS 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 AUTHORI TY 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 UNITED NATIONS HAD RESULTED IN THE PRIORITIZATION OF 3 168 CONTRACTS VALUED AT MORE THAN $ 8.5 BILLION. (UPDATED 4 NOVEMBER 2003). 59. FURTHER THE OBSERVATIONS OF TRIBUNAL WITH REGARD TO VCR WERE AS UNDER: - 6. TO THE EXTENT RELEVANT FOR OUR PURPOSES THE FFOP WORKED LIKE THIS. THE IRAQI GOVERNMENT WAS ALLOWED TO EXPORT OIL BUT THE SALE PROC EEDS WERE TO BE DEPOSITED IN AN ESCROW ACCOUNT AND THESE SALE PROCEEDS WERE TO BE PARTLY THOUGH SUBSTANTIALLY USED FOR IMPORTING GOODS ON HUMANITARIAN GROUNDS FOR IRAQ PEOPLE. THE GOODS SO ALLOWED TO BE IMPORTED WERE FOODSTUFF MEDICINES AND OTHER NEC ESSITIES FOR DAY TO DAY LIFE OF ORDINARY PEOPLE. THE MANNER IN WHICH PROGRAM WORKED CAME UP FOR SHARP CRITICISM FOR ITS FUNCTIONING AND THERE WERE ALLEGATIONS OF MASSIVE IRREGULARITIES ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 59 KICKBACKS AND CORRUPTION IN ITS FUNCTIONING. IT WAS IN THIS BACKDROP THAT AN ENQUIRY COMMISSION NAMED AS INDEPENDENT INQUIRY COMMITTEE HEADED BY PAUL A. VOLKER A FORMER CHAIRMAN OF UNITED STATES FEDERAL RESERVE RESEARCHED POSSIBLE CORRUPTION IN THIS IRAQI OIL FOR FOOD PROGRAM. THE TERMS OF REFERENCE OF THIS INQUIRY WER E AS FOLLOWS: THE INDEPENDENT INQUIRY SHALL COLLECT AND EXAMINE INFORMATION RELATING TO THE ADMINISTRATION AND MANAGEMENT OF THE OIL - FOR - FOOD PROGRAMME INCLUDING ALLEGATIONS OF FRAUD AND CORRUPTION ON THE PART OF UNITED NATIONS OFFICIALS PERSONNEL AND AGENTS AS WELL AS CONTRACTORS INCLUDING ENTITIES THAT HAVE ENTERED INTO CONTRACTS WITH THE UNITED NATIONS OR WITH IRAQ UNDER THE PROGRAMME: (A) TO DETERMINE WHETHER THE PROCEDURES ESTABLISHED BY THE ORGANIZATION INCLUDING THE SECURITY COUNCIL AND THE SECURITY COUNCIL COMMITTEE ESTABLISHED BY RESOLUTION 661 (1990) CONCERNING THE SITUATION BETWEEN IRAQ AND KUWAIT (HEREINAFTER REFERRED TO AS THE '661 COMMITTEE') FOR THE PROCESSING AND APPROVAL OF CONTRACTS UNDER THE PROGRAMME AND THE MONITORING OF THE SA LE AND DELIVERY OF PETROLEUM AND PETROLEUM PRODUCTS AND THE PURCHASE AND DELIVERY OF HUMANITARIAN GOODS WERE VIOLATED BEARING IN MIND THE RESPECTIVE ROLES OF UNITED NATIONS OFFICIALS PERSONNEL AND AGENTS AS WELL AS ENTITIES THAT HAVE ENTERED INTO CONTR ACTS WITH THE UNITED NATIONS OR WITH IRAQ UNDER THE PROGRAMME; (B) TO DETERMINE WHETHER ANY UNITED NATIONS OFFICIALS PERSONNEL AGENTS OR CONTRACTORS ENGAGED 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; OF HUMANITARIAN GOODS; (C) TO DETERMINE WHETHER THE ACCOUNTS OF THE PROGRAMME WERE IN ORDE R 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 REP ORT 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 APP EAL 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 THE DISALLOWANCE BEFORE US PERTAINS TO THE COMMISSION PAYMENT BY THE ASSESSEE IN THE FORM OF INLAND TRANSPORTATION FEES AND AFTER SALES SERVICE TO A COMPANY BY THE NAME OF ALIA TRANSPORTATION AND GENERAL TRADING CO. INTERESTINGLY THIS COMPANY I.E. ALIA TRANSPORTATION AND GENERAL TRADING CO. FINDS A PROMINENT MENTION IN THE FINAL REPORT IS SUED BY THE IIC. ACCORDING TO THE IIC REPORT WHICH IS POPULARLY KNOWN AS VOLKER COMMITTEE REPORT ALIA WAS A KEY PLAYER IN THE IRREGULARITIES RELATING TO OIL FOR FOOD PROGRAM ADMINISTERED BY THE UNITED NATIONS. VOLKER COMMITTEE REPORT ( WWW.IIC - OFFP.ORG) DESCRIBES ALIA AS ONE OF THE IRAQI FRONT COMPANIES AND STATES AT PAGE 309 AS FOLLOWS: ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 60 .. VII: IRAQI FRONT COMPANIES THREE OF THE MAJOR IRAQI FRONT COMPANIES WERE: (1) ALIA FOR TRANSPORTATION AND GENERAL TRADE (ALIA) OF JORDAN; (2) AL - HODA INTERNATIONAL TRADING CO. (AL - HODA) OF THE UNITED ARAB EMIRATES; AND (3) AL WASEL & BABEL GENERAL TRADING LLC (AL WASEL & BABEL) OF THE UNITED ARAB EMIRATES. 495 EACH OF THESE COMPANIES IS DISCUSSED IN TURN. A: ALIA FOR TRANSPORTATION AND GENERAL TRA DE: ALIA WAS ESTABLISHED IN AUGUST 1994 AS A JOINT VENTURE BETWEEN HUSSAIN AL - KHAWAM AN IRAQI BUSINESSMAN AND THE IRAQI MINISTRY OF TRANSPORTATION. THIS ARRANGEMENT DEVELOPED FROM A PROPOSAL BY MR. AL - KHAWAM TO REFURBISH IRAQI VESSELS STRANDED OFF THE C OAST OF JORDAN AND TO USE THEM FOR COMMERCIAL SHIPPING. AT THE TIME OF ALIAS REGISTRATION JORDANIAN LAW REQUIRED THAT AT LEAST ONE OWNER OF A JORDAN - REGISTERED COMPANY BE A JORDANIAN NATIONAL. AS A RESULT MR. AL - KHAWAM NOMINATED A CLOSE ASSOCIATE MOTA SSET FAWZY QATISHAT TO HOLD FIFTY - ONE PERCENT OF THE COMPANYS SHARES ON MR. AL - KHAWAMS BEHALF. THE IRAQI MINISTRY OF TRANSPORTATION ASSIGNED TWO OF ITS EMPLOYEES TO HOLD ALIAS REMAINING SHARES. IN 1999 THE MINISTRY OF TRANSPORTATION ARRANGED WITH AL IA TO HAVE IT ACT AS ISCWTS (IRAQ STATE COMPANY FOR WATER TRANSPORT) COLLECTION AGENT FOR SUPPLIERS PAYMENTS FOR THE INLAND TRANSPORTATION OF GOODS ARRIVING AT THE PORT OF UMM QASR. AS COLLECTION AGENT ALIA RECEIVED A SMALL COMMISSION ON THE FUNDS IT CH ANNELED FROM SUPPLIERS TO ISCWT. ACCORDING TO BANK RECORDS ALIA BEGAN RECEIVING FEES FROM SUPPLIERS AS EARLY AS MARCH 2000 . THE AGENT ARRANGEMENT WITH ALIA WAS USEFUL TO THE GOVERNMENT OF IRAQ. AS NOTED IN SECTION II.B ABOVE ALIA VIOLATED AND ASSISTED I N 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 FINANCIAL TRANSACTIONS WITH THE GOVERNMENT OF IRAQ EXCEPT AS PERMITTED UNDER THE PROGRAMME OR SECURITY COUNCIL RESOLUTIONS. BY ARRANGING FOR SUPPLIERS TO MAK E 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 ALIAS GENERAL MANAGER STATED: THERE WERE NO ACTUAL COSTS. THE DRIVER GOT MAYBE $10. THIS WAS A PAYMENT TO THE GOVERNMENT OF IRAQ. ALIAS GENERAL MANAGER WAS UNAWARE WHETHER THE ACTUAL COSTS FOR TR ANSPORT HAD ANY BEARING ON THE TRANSPORTATION FEE CHARGED AND COLLECTED BY ALIA. FOLLOWING THE CONCLUSION OF CONTRACT NEGOTIATIONS BETWEEN AN IRAQI PURCHASING BODY AND A SUPPLIER ISCWT CONTACTED ALIA BY FAX LETTER OR TELEPHONE AND INFORMED ALIA OF THE AMOUNT THAT WAS TO BE RECEIVED FROM THE SUPPLIER. ON SOME OCCASIONS ISCWT CONTACTED THE SUPPLIER DIRECTLY TO ADVISE THE SUPPLIER THAT IT SHOULD SEND PAYMENT TO ALIA OR SENT THE SAME INVOICE TO THE SUPPLIER THAT IT SENT TO ALIA. ON OTHER OCCASIONS ALIA S ENT INVOICES TO SUPPLIERS INDICATING THE AMOUNTS LEVIED BY ISCWT. REPRESENTATIVES OF ISCWT CAME TO ALIAS OFFICE EVERY MONTH TO INSPECT THE COMPANYS RECORDS AND ISCWT ALSO SENT AN EMPLOYEE TO WORK AT ALIA. SUPPLIERS PAID THEIR FEES IN VARIOUS FOREIGN C URRENCIES (NOT IRAQI DINARS) TO ALIAS ACCOUNTS AT JORDAN NATIONAL BANK AND THE EGYPTIAN ARAB LAND BANK. UPON RECEIPT OF THE FUNDS ALIA INFORMED ISCWT OF THE AMOUNT OF THE TRANSFER AND THE CORRESPONDING SUPPLIER CONTRACT SHIP AND LETTER OF CREDIT. BELO W IS ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 61 ONE SUCH EXAMPLE OF A LETTER FROM ALIA TO ISCWT ADVISING ISCWT OF ITS RECEIPT OF PAYMENT ON ISCWTS BEHALF: (TRANSLATED FROM ARABIC - PAGE 1 OF 1) ALIA COMPANY FOR TRANSPORTATION AND GENERAL TRADE NO. F8/5087/2002 DATE : 20/11/2002 TO : STATE C OMPANY OF WATER TRANSPORT BASRA ATTN : MS ELHAM MARINE AGENCIES SUB : MV MAKRAM GREETINGS ! WE WOULD LIKE TO INFORM YOU THAT THE AMOUNTS BELOW HAVE BEEN RECEIVED FROM JAWALA COMPANY FOR INTERNAL TRANSPORTATION AND AFTER SALES SERVICE FEES FOR 2329.1 897 M3 OF WOOD ; LC NO. V734538 BILL OF LADING NO PK/IRAQ/001 BASED ON THE FOLLOWING: $ 60 225.31 FOR INTERNAL TRANSPORTATION FEES 236 477.40 FOR AFTER SALES SERVICE WE THANK YOU FOR YOUR COOPERATION WITH US. WITH UTMOST RESPECT AND APPRECIATION FINANCIAL/ HAITHAM EL - ZOBI COPY TO : STATE WATER TRANSPORT CO BAGHDAD BAGHDAD SHIPS SHIPPING DEPARTMENT SHORTLY AFTER SENDIN G SUCH COMMUNICATIONS ALIA TRANSFERRED THE FULL PAYMENT AMOUNT (LESS A COMMISSION BETWEEN ONE - QUARTER PERCENT AND ONE PERCENT) TO ISCWTS ACCOUNT AT RAFIDAIN BANK IN AMMAN. FOR THESE TRANSFERS ALIA USED ACCOUNTS IN VARIOUS FOREIGN EXCHANGE CURRENCIES. IN TOTAL BETWEEN MARCH 2000 AND DECEMBER 2003 THE PAYMENTS PASSING THROUGH ALIAS BANK ACCOUNTS IN JORDAN NATIONAL BANK AMOUNTED TO A USD EQUIVALENT OF MORE THAN $788 MILLION. APART FROM ACTING AS A COLLECTION AGENT ALIA ALSO ENGAGED IN FIVE SALES CONTR ACTS UNDER THE PROGRAMME. DURING PHASE VIII OF 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 TRANSP ORTATION 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 TH AT IT INFLATED THE PRICE OF THIS CONTRACT BY MORE THAN $4 000 PER VEHICLE AT THE GOVERNMENT OF IRAQS 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 AVAILAB LE 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 O WN 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 62 SERVICES WERE ACTUALLY RENDERED BY ALIA WHICH IN TURN ACTED AS CONDU I T FOR THE IRAQI REGIME WHERE LESSER MARGIN WAS RETAINED BY ALIA AND THE BALANCE AMOUNT WAS TRANSFERRED TO IRAQI REGIME AS ILLEGAL KICKBACKS THE SAID AMOUNTS WERE NOT ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT IN VIEW OF EXPLANATION TO S ECTION 37(1) OF THE ACT. ON THE OPPOSITE THE CASE OF ASSESSEE WAS THAT THE FIRST ISSUE RAISED BY THE ASSESSEE WAS THAT THE ASSESSEE HAD NOT BE EN SUPPLIED WITH THE COPY OF VCR AND HENCE THERE WAS VIOLATION OF PRINCIPLES OF NATURAL JUSTICE EQUITY AND FAI R PLAY. THE TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) DID NOT ACCEPT THE PLEA OF ASSESSEE SINCE THE VCR WAS FREELY AVAILABLE ON INTERNET WAS FULLY IN PUBLIC DOMAIN AND ANYONE COULD ACCESS IT. THE TRIBUNAL FURTHER CLARIFIED THE SAME BY HOLDI NG THAT HAVING SAID THAT WE MUST QUICKLY ADD THAT MERELY BECAUSE THIS REPORT STATES THAT THE AMOUNTS PAID TO ALIA WERE ACTUALLY KICKBACKS TO IRAQI REGIME THAT FACT PER SE WOULD NOT RENDER THE EXPENDITURE SO INCURRED IF OTHERWISE DEDUCTIBLE AS NON - DEDUC TIBLE IN COMPUTATION OF BUSINESS INCOME UNLESS THESE PAYMENTS ARE HIT BY SOME OTHER DISABLING PROVISIONS OF THE INCOME TAX ACT. SOME OTHER DISABLING PROVISIONS OF THE INCOME TAX ACT. 61. THE TRIBUNAL THUS FIRST TOOK NOTE OF THE FACT THAT WHETHER THE AMOUNTS PAID WERE DEDUCTIBLE AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT OR ARE HIT BY EXPLANATION TO SECTION 37(1) OF THE ACT. IN THE FACTS OF THE CASE OF DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) THE ASSESSEE ADMITTEDLY HAD MADE PAYMENTS TO ALIA IN LINE WITH UNDERSTANDING OF APPOINTING ALIA TO PRO VIDE ASSF. THE SAID CONCERN HAD GIVEN ITS ACCEPTANCE TO THE SAID TERMS. THE TRIBUNAL FURTHER OBSERVED IN PARA 10 THAT BUT THEN SO FAR AS THE CHARACTER OF THESE PAYMENTS BEING KICKBACK IS CONCERNED THAT WAS BETWEEN ALIA AND IRAQI REGIME AND THESE WERE TH E TRANSACTIONS BETWEEN ALIA AND IRAQI REGIME WHICH COULD BE TERMED AS ILLEGAL AND IN VIOLATION OF UN SANCTIONS. THE ILLEGALITY IF AT ALL THEREFORE WAS THAT THE PAYMENTS WERE MADE BY THE EXPORTERS ENDED UP WITH IRAQI REGIME WHICH WAS IN VIOLATION WITH T HE UN SANCTIONS. THE STAGE AT WHICH THIS ILLEGALITY OCCURRED WAS THE INTER SE TRANSACTION ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 63 BETWEEN ALIA AND IRAQI REGIME SOMETHING OVER WHICH THE ASSESSEE HAD NO CONTROL . REFERENCE WAS MADE TO VCR IN THE SAID PARA 10 ITSELF VIS - - VIS ITS FINDING WHICH RE ADS AS UNDER: - AS NOTED BY THE VOLKER COMMITTEE REPORT ITSELF 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 PER MITTED 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 N ATURE 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 ASSESSEES 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 ST AGE 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 PAYM ENTS 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 MANOEUVRINGS WERE DESIGNED BY THE IRAQI REGIME AND THE FRONT COMPANIES WERE SET UP BY THE IRAQI DESIGNED BY THE IRAQI REGIME AND THE FRONT COMPANIES WERE SET UP BY THE IRAQI REGIME. THE EXPORTERS HAD NO ROLE IN DEVISING THESE INNOVATIVE MECHANISM TO RAISE THEM MONIES. THE VOLKER COMMITTEE ITSELF ACKNOWLEDGES THE FACT THAT THESE PAYMENTS TO THE IRAQI REGIME WERE DISGUISED BY VARIOUS SUBTERFUGES AND WE RE NOT REPORTED TO THE UNITED NATIONS BY IRAQ OR TO THE PARTICIPATING CONTRACTORS (LIKE THE ASSESSEE BEFORE US) LET ALONE APPROVE BY THE UNITED NATIONS AS PERMISSIBLE PAYMENTS FROM ESCROW ACCOUNT . WHEN IT IS NOT EVEN THE CASE MADE OUT IN THE VOLKER COMMI TTEE REPORT THAT THE PARTICIPATING EXPORTERS IN THE OFFP LIKE THE ASSESSEE BEFORE US WERE ALL ALONG AWARE ABOUT THE FACT THAT THESE FRONT COMPANIES TO ONE OF WHICH HE HAS MADE THE PAYMENTS ARE NOTHING MORE THAN CONDUITS FOR IRAQI REGIME THIS REPORT CA N NOT BE LEAD TO THE ASSESSING OFFICERS FINDING THAT THE PAYMENTS WERE MADE FOR THE KICKBACKS TO THE IRAQI REGIME. WE MAY IN THIS REGARD REFER TO THE FOLLOWING OBSERVATIONS MADE BY THE VOLKER COMMITTEE REPORT AT PAGES 249 - 250: IRAQS LARGEST SOURCE OF ILLICIT INCOME IN RELATION TO THE PROGRAMME CAME FROM KICKBACKS PAID BY COMPANIES THAT IT SELECTED TO RECEIVE CONTRACTS FOR HUMANITARIAN GOODS. THESE PAYMENTS TO THE IRAQI REGIME WERE DISGUISED BY VARIOUS SUBTERFUGES AND WERE NOT REPORTED TO THE UNITED N ATIONS BY IRAQ OR THE PARTICIPATING CONTRACTORS LET ALONE APPROVED BY THE UNITED NATIONS AS PERMISSIBLE PAYMENTS FROM THE ESCROW ACCOUNT. AS SET FORTH IN THE COMMITTEES RECENT PROGRAMME MANAGEMENT REPORT AVAILABLE EVIDENCE INDICATES THAT IRAQ DERIVED MOR E THAN $1.5 BILLION IN INCOME FROM THESE KICKBACKS. AS WITH ITS SELECTION OF OIL PURCHASERS POLITICAL CONSIDERATIONS INFLUENCED IRAQS SELECTION OF HUMANITARIAN VENDORS. FOR THE FIRST SEVERAL YEARS OF THE PROGRAMMES OPERATION HOWEVER IRAQ DID NOT HAV E IN PLACE A FORMAL KICKBACK POLICY. THE KICKBACK POLICY EMERGED ONLY OVER TIME AS THE PROGRAMME EXTENDED FOR A LONGER PERIOD AND INVOLVED LARGER AMOUNTS THAN ANTICIPATED. THE KICKBACK POLICY DEVELOPED IN MID - 1999 FROM IRAQS EFFORT TO RECOUP PURPORTED COS TS IT INCURRED TO TRANSPORT ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 64 GOODS TO INLAND DESTINATIONS AFTER THEIR ARRIVAL BY SEA AT THE PERSIAN GULF PORT OF UMM QASR. RATHER THAN SEEKING APPROVAL FROM THE UNITED NATIONS FOR COMPENSATION OF SUCH COSTS FROM THE PROGRAMMES ESCROW ACCOUNT IRAQ SIMPLY R EQUIRED 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 A N 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 - SE RVICE 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. CONTRACTO RS 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 COLLECTED A TEN PERCENT FEE WITHOUT LABELING IT AN AFTER - S ALES - SERVICE FEE OR WITHOUT INSERTING AN AFTER - SALES - SERVICE PROVISION IN THE APPLICABLE CONTRACT. MANY COMPANIES FREELY WENT ALONG WITH IRAQS DEMANDS . OTHERS MADE PAYMENTS TO THIRD PARTIES OR AGENTS WHILE DISREGARDING THE LIKELY PURPOSE OF THESE PAYMEN TS OR PERHAPS UNWITTINGLY . INDEED THE COMMITTEE CALCULATES THAT MORE THAN 2 200 COMPANIES WORLDWIDE PAID KICKBACKS TO IRAQ IN THE FORM OF INLAND TRANSPORTATION FEES AFTER - SALES - SERVICE FEES OR BOTH. 63. THE FINDINGS OF TRIBUNAL THEREAFTER ARE AS UND ER: - 63. THE FINDINGS OF TRIBUNAL THEREAFTER ARE AS UND ER: - 11. AS A MATTER OF FACT THIS VOLKER COMMITTEE REPORT GOES ON TO ACKNOWLEDGE THE FACT THAT WHILE MANY COMPANIES FREELY WENT ALONG WITH IRAQS DEMAND FOR KICKBACKS MANY COMPANIES IGNORED THE PROBABLE USE OF THESE PAYMENTS THERE WERE ALSO THE COMPA NIES WHICH WERE NOT AWARE ABOUT THE END USE OF THESE PAYMENTS AND MADE THESE PAYMENTS UNWITTINGLY. THERE WERE THUS THREE CATEGORIES OF PERSONS WHO PAID THE KICKBACKS (A) FIRST THE PERSONS WHO WERE ALL ALONG AWARE THAT THE PAYMENTS AS AFTER SALES SERVICE F EE AND INLAND TRANSPORTATION FEES ARE IN THE NATURE OF KICKBACKS AND THEY WERE THUS WILLING PARTIES TO THESE ILLEGAL GRATIFICATIONS; (B) SECOND THE PERSONS WHO HAD SUSPICION THAT THE AMOUNTS PAID AS AFTER SALES SERVICE FEES AND INLAND TRANSPORTATION FEES TO MAY BE USED AS KICKBACKS BUT THEY IGNORED THESE DOUBTS; AND (C) THIRD THE PERSONS WHO PAID THE AMOUNTS AS AFTER SALES SERVICE FEES AND INLAND TRANSPORTATION FEES UNDER THE BONAFIDE BELIEF THAT THESE PAYMENTS ARE BEING MADE FOR THE STATED PURPOSES. IN O UR HUMBLE UNDERSTANDING SO FAR AS CATEGORY (A) IS CONCERNED EXPLANATION TO SECTION 37(1) MAY HIT THE DEDUCTIBILITY OF IMPUGNED PAYMENTS BUT SO FAR AS CATEGORIES (B) AND (C) ARE CONCERNED EXPLANATION TO SECTION 37(1) CANNOT COME INTO PLAY. THE ONUS OF D EMONSTRATING THAT THE CASE OF AN ASSESSEE FALLS IN CATEGORY (A) IN OUR HUMBLE UNDERSTANDING IS ON THE ASSESSING OFFICER. THAT ONUS HAS NOT BEEN DISCHARGED AT ALL. THE REASONING OF OUR ABOVE APPROACH IS THIS. EXPLANATION TO SECTION 37(1) PROHIBITS DEDUCTI BILITY OF ANY PAYMENT FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. EVEN IF WE ASSUME THAT A PAYMENT FOR KICKBACK TO IRAQI REGIME WHICH IS PROHIBITED BY UN SANCTIONS COULD INDEED BE VIEWED AS PROHIBITED BY LAW WOULD NOT RENDER ALL P AYMENTS 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 PU RPOSES 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 65 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 A N 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 SUSPICIO N 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 C ONSIDERATION FOR THESE PAYMENTS IS EVIDENT FROM THE VOLKER COMMITTEE REPORT ITSELF. THE SERVICES WERE RENDERED TO THE EXPORTERS BUT THESE SERVICES WERE RENDERED BY THE IRAQI REGIME AND THE MONEY WAS PASSED BY THE FRONT COMPANIES TO THE IRAQI REGIME. EVEN T HE VOLKER COMMITTEE REPORT WHICH CONSTITUTES FOUNDATION OF THE IMPUGNED DISALLOWANCES HAS MADE FOLLOWING OBSERVATIONS IN SUPPORT OF THIS PROPOSITION: IN FACT ALL TRANSPORTATION SERVICES FOR WHICH ALIA RECEIVED PAYMENT FROM HUMANITARIAN SUPPLIERS WERE P ROVIDED 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). (PAGE 304 OF THE REPORT) VESSELS BERTHING AT UMM QASR REQUIRED THE APPRO VAL OF THE IRAQI STATE COMPANY FOR WATER TRANSPORT (ISCWT) BEFORE BEING PERMITTED TO DISCHARGE. ISCWT WAS ONE OF OVER A DOZEN SOES OVERSEEN BY THE MINISTRY OF TRANSPORTATION AND COMMUNICATION (MINISTRY OF TRANSPORTATION). UNDER IRAQI LAW ISCWT HAD EXC LUSIVE AUTHORITY FOR ALL ACTIVITY AT IRAQI PORTS. ITS OFFICIAL FUNCTION WAS TO ARRANGE AND AUTHORIZE THE UNLOADING OF CARGO AND TO ACT AS A FUNCTION WAS TO ARRANGE AND AUTHORIZE THE UNLOADING OF CARGO AND TO ACT AS A MARINE AGENT FOR SHIPS CARRYING PROCURED GOODS. IN ADDITION IT REPRESENTED TO THE UNITED NATIONS THAT IT COORDINATE D TRANSPORT TO INTERNAL WAREHOUSES AND INFORMED IRAQI END - USERS OF INBOUND GOODS. HOWEVER ISCWT EMPLOYEES DID NOT THEMSELVES ACTUALLY PARTICIPATE IN THE DISCHARGE AND HANDLING OF CARGOES. THE IRAQI STATE COMPANY FOR PORTS ANOTHER SOE WITHIN THE MINISTRY OF TRANSPORTATION ASSUMED THAT RESPONSIBILITY. (PAGE 264 OF THE REPORT) IF ISCWT HAD NOT RECEIVED CONFIRMATION OF A SUPPLIER HAVING PAID INTO AN IRAQI - CONTROLLED BANK ACCOUNT IT GENERALLY WOULD NOT PERMIT DISCHARGE OF THE SUPPLIERS CARGOES. IN SUCH CIRCUMSTANCES THE SUPPLIER OR VESSEL CHARTERING COMPANY INCURRED DEMURRAGE OF THOUSANDS OF DOLLARS A DAY. ONE SUPPLIER INTERVIEWED BY THE COMMITTEE RECALLED THAT A SUPPLIERS FAILURE TO PAY FEES EVEN ON JUST ONE CONTRACT RESULTED IN LARGE DEMURRAGE AND PREVENTED THE VESSELS ENTIRE CONTENTS FROM BEING OFFLOADED (PAGE 272 OF THE REPORT) (EMPHASIS BY UNDERLINING SUPPLIED BY US) 13. IT WOULD THUS SEEM THAT EVEN AS PER VOLKER COMMITTEE REPORT THE SERVICES WERE INDEED RENDERED FOR THE COMMISSION PAY MENTS 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. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 66 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 REVENUES 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 TH E HANDS OF THE ASSESSEE IS CONCERNED. 6 4 . 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 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 A ND 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). 17. THE OBJECTIONS TO THE SAID COMMISSION PAYMENTS DONOT THEREFORE ARE NOT THEREFORE SUSTAINABLE IN LAW SO FAR AS DEDUCTIBILITY UNDER SECTION 37(1) IS CONCERNED. 6 5 . AT THIS JUNCTURE ITSELF IT MAY BE POINTED OUT THAT THE HONBLE CALCUTTA HIGH COURT IN ITA NO .49 OF 2013 GA NO.480 OF 2013 GA NO.483 OF 2013 IN APPEAL FILED BY THE REVENUE VIDE JUDGMENT DATED 24.04.2013 HAD UPHELD THE FINDINGS OF TRIBUNAL BOTH ON FACTS AND IN LAW AND THE APPEAL OF REVENUE WAS DISMISSED. 6 6 . APPLYING THE SAID RATIO OF KOLKATA BENCH OF TRIBUNAL IN ORDER TO ADJUDICATE THE ISSUE RAISED IN THE PRESENT SET OF APPEALS WE NEED TO REFER TO THE FACTS OF THE CASE. THE ASSESSEE HAD ENTERED INTO CONTRACT WITH STATE COMPANY FOR AGRICULTURAL SUPPLIES BAGHDAD FOR SUPPLY OF 350 GENSETS WITH DIESEL ENGINE . THE COPY OF SAID CONTRACT NO.M(M.O.U)VI/166/99 IS PLACED AT PAGES 20 TO 27 OF THE PAPER BOOK WHICH WAS EXECUTED ON 25.10.1999. THE ASSESSEE HAD ALSO ENTERED INTO CONTRACT WITH IG DATED 27.05.1999 VIDE CONTRACT NO.M(M.O.U)114/99 FOR SUPPLY OF 500 WATER PU MPS ENGINES DRIVEN COPY OF WHICH IS PLACED AT PAGES 166 TO 171 OF THE PAPER BOOK. ANOTHER CONTRACT ENTERED INTO BY THE ASSESSEE WITH THE IRAQI GOVERNMENT ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 67 WAS DATED 03.05.2000 CONTRACT NO.M(M.O.U.)255/2000 COPY OF WHICH IS PLACED AT PAGES 28 TO 32 OF TH E PAPER BOOK FOR SUPPLY OF 1500 WATER PUMPS WITH DIESEL ENGINES . THE ASSESSEE HAS FILED THE TABULATED CHART OF STATEMENTS SHOWING FREIGHT PAID ON FEW INVOICES UNDER WHICH THE GOODS WERE SUPPLIED BY THE ASSESSEE TO BAGHDAD. THE CASE OF ASSESSEE BEFORE US WAS THAT AS PER UNDERSTANDING BETWEEN THE PARTIES GOODS HAD TO BE DELIVERED BY THE ASSESSEE TO BAGHDAD AND THERE WAS NO QUESTION OF ENGAGING ANY OTHER PARTY FOR THIS PURPOSE. FOR UNDERTAKING AFTER SALES SERVICE THE ASSESSEE POINTED OUT THAT IT HAD ENTE RED 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 . FURTH ER 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. BEING PAID @ 12.5% ON ALL EXPORTS TO VARIOUS COUNTRIES INCLUDING IRAQ. 6 7 . 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 B ETWEEN 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 COUNTRIE S OF MIDDLE EAST INCLUDING IRAQ. AS PER THE TERMS OF CONTRACT KME WAS APPOINTED AS DISTRIBUTOR FOR PROMOTING EXPORTS TO MIDDLE EAST COUNTRIES . THIS AGREEMENT WAS ENTERED ON 01.04.1997 AND THE MAXIMUM COMMISSION THAT COULD BE PAID TO THEM UNDER THE TERMS OF CONTRACT WAS 12.5% OF VALUE OF THE ORDER. THE ASSESSEE CLAIMS THAT DURING ASSESSMENT YEAR 2001 - 02 IT HAD EFFECTED SALES TO VARIOUS MIDDLE EAST COUNTRIES SUCH AS MOROCCO OMAN IRA N EGYPT SAUDI ARABIA AS ALSO IRAQ . ON ALL THESE ORDERS COMMISSION WAS PAID @ ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 68 UPTO 12.5% OF THE ORDER VALUE. SIMILARLY COMMISSION @ 12.5% WAS ALSO PAID ON SUPPLIES TO IG. THE ASSESSEE HAS PLACED THE DETAILS OF COMMISSION PAID AT PAGES 130 TO 132 OF THE PAPER BOOK WHEREIN KME WAS MOSTLY PAID COMMISSION @ 12.5%. NO EXT RA COMMISSION WAS PAID FOR SALES EFFECTED TO THE IG. ANOTHER ASPECT TO BE KEPT IN MIND IS THAT AS PER TERMS OF THE CONTRACT THE SAID KME WAS RESPONSIBLE FOR AFTER SALES SERVICES FOR THE PRODUCTS OF ASSESSEE WHICH WERE SOLD TO THEM. UNDER THESE CIRCUMST ANCES THE ASSESSEE CLAIMS THAT NO SEPARATE ASSF CHARGES WERE PAID. ADMITTEDLY THE SAID CONTRACT WAS ENTERED MUCH BEFORE IMPOSITION OF SANCTIONS BY UNSC ON THE IG. THE CONTRACT ENTERED INTO BY THE ASSESSEE WITH KME WAS RENEWED FROM TIME TO TIME AND UNDE R EACH SUCH RENEWAL COMMISSION WAS AGREED TO BE PAID @ 12.5% ONLY IN RESPECT OF SALE TO ALL THE MIDDLE EAST COUNTRIES. THE ASSESSING OFFICER OR CIT(A) ADMITTEDLY HAD NOT MADE ANY ADDITION ON ACCOUNT OF ITF AND EVEN THE CASE OF ASSESSEE BEFORE US WAS THA T ALL THE EXPENDITURE IN RESPECT OF TRANSPORTATION W AS BORNE BY IT AND DEBITED TO THE BOOKS OF ACCOUNT. AS PER THE TERMS OF CONTRACT FOR SUPPLY OF GOODS TO THE IG THE SAID GOODS WERE TO BE PER THE TERMS OF CONTRACT FOR SUPPLY OF GOODS TO THE IG THE SAID GOODS WERE TO BE SUPPLIED TO CIF BAGHDAD AND HENCE TRANSPORTATION COST HAS BEEN D EBITED BY THE ASSESSEE TO ITS PROFIT & LOSS ACCOUNT AND HAS BEEN ALLOWED IN THE HANDS OF ASSESSEE. THE ASSESSING OFFICER MADE ADDITION IN THE HANDS OF ASSESSEE ON ACCOUNT OF ALLEGED PAYMENTS BEING MADE UNDER THE HEAD ASSF IN ASSESSMENT YEAR 2001 - 02 ADDIT ION WAS MADE TO THE EXTENT OF RS.1.47 CRORES BEING 10% OF VALUE OF THE GOODS EXPORTED AND IN ASSESSMENT YEAR 2002 - 03 ADDITION WAS MADE TO THE EXTENT OF RS.90 70 637/ - . 68. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD HAD POINTED OUT THAT IN THE VCR THE AMOUNT WAS FIGURE OF USD 1 61 506 WHICH IS EQUIVALENT TO ABOUT RS.85 LAKHS AND HAS NO CONNECTION TO THE ASSESSEE SINCE IT IS NOT RELATED TO THE CONTRACTS DURING THE RELEVANT YEAR. IN SUCH SCENARIO WHERE THE ASSESSEE HAD AN UNDERS TANDING WITH ITS AGENT KME TO ACT AS DISTRIBUTOR AND OBTAIN ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 69 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 UNDER STANDING 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 ADDITI ON AL AMOUNT HAD BEEN PAID TO THE IG BY THE ASSESSEE ON ACCOUNT OF ASSF . N O 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 B EFORE THE VCR AND TO COME TO FINDING OF PAYMENT OF KICKBACKS AND IN THE ABSENCE OF SAME NO ADVERSE VIEW COULD BE TAKEN. WE FIND MERIT IN THE SAID PLEA OF THE ASSESSEE SINCE AGAINST THE NAME OF ASSESSEE IN VCR THE FIGURE OF USD 161056 IS ASSESSEE SINCE AGAINST THE NAME OF ASSESSEE IN VCR THE FIGURE OF USD 161056 IS MENTIONED IS EQU IVALENT TO ABOUT RS.85 LAKHS . ON THE OTHER HAND THE ASSESSING OFFICER HAD MADE ADDITION TO THE EXTENT OF RS.1.47 CRORES IN ASSESSMENT YEAR 2001 - 02 AND ABOUT RS.90 LAKHS IN ASSESSMENT YEAR 2002 - 03. ANOTHER ASPECT OF THE SAID PAYMENT OF COMMISSION TO KME IS THAT THE SAME HAS BEEN ALLOWED IN ENTIRETY BY THE ASSESSING OFFICER. HOWEVER THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE UNDER THE OIL FOR FOOD PROGRAMME THE IG WAS TAKING KICKBACKS IN THE FORM OF ASSF THEN SUCH EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE AND SINCE THE SAME WAS NOT DEBITED TO PROFIT & LOSS ACCOUNT THE SAME CONSTITUTES UNEXPLAINED EXPENDITURE AND WAS TO BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 69C OF THE ACT. FIRST OF ALL THERE IS HEAVY ONUS UPON THE ASSESSING OFF ICER TO ESTABLISH THE CASE OF UNEXPLAINED EXPENDITURE UNDER SECTION 69C OF THE ACT AND SUCH DISALLOWANCE CANNOT BE MADE ON THE BASIS OF MERE PRESUMPTIONS AND SUSPICIO N S. THOUGH THE NAME OF ASSESSEE APPEAR S IN VCR BUT THAT DOES NOT ESTABLISH THAT THE SAID ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 70 EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE ESPECIALLY IN THE CIRCUMSTANCES WHERE THE ASSESSEE HAD ALREADY ENTERED INTO AN AGREEMENT WITH ITS AGENT KME TO PROVIDE AFTER SALES SERVICE AND ALSO BECAUSE OF REASONS REFERRED ABOVE . THE REPORT OF VCR HAD NOT BEEN ACCEPTED BY THE GOVERNMENT OF INDIA AND PATHAK COMMITTEE WAS CONSTITUTED TO FURTHER INVESTIGATE THE VERACITY OF SAID ISSUE. UNDOUBTEDLY SECURITY COUNCIL OF UN HAD APPOINTED COMMITTEE TO VERIFY THE ALLEGATIONS OF PAYMENT OF KICKBACKS IN THE OIL FOR FOOD PROGRAMME BUT THE FINDINGS OF VCR CAN ONLY BE APPLIED WHERE THE PERSONS MAKING TH E PAYMENTS WERE ALL ALONG AWARE ABOUT THE NATURE OF KICKBACKS AND THEY WERE WILLING PARTIES TO SUCH ILLEGAL GRATIFICATION . BU T THERE WAS ANOTHER CATEGORY OF PERSONS WHER E THOUGH THEY HAD SUSPICION THAT THE AMOUNTS PAID AS ASSF AND ITF MAY BE USED AS KICKBACKS BUT THEY MADE THE PAYMENTS IGNORING THE DOUBTS. THERE WAS ANOTHER CATEGORY OF PERSONS WHO PAID THE AMOUNTS ON ACCOUNT OF ASSF AND ITF UNDER THE BONAFIDE BELIEF THA T THE SAID PAYMENTS WERE BEING MADE FOR THE REQUISITE PURPOSE. THE KOLKATA BENCH OF TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) HAS HELD KOLKATA BENCH OF TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) HAS HELD THAT THE EXPLANATION TO SECTION 37(1) OF THE ACT MAY HIT THE DEDUCTIBILITY OF THE IMPUGNED PAYMENTS OF PERS ONS 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 PAY MENTS 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 A ND 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 71 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 HONBLE CALCUTTA HIGH COURT IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA). APPLYING THE SAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE THE FIRST ASPECT OF THE ISSUE IS THAT NO DISALLOWANCE HAS BEEN MADE UNDER SECTION 37(1) OR EXPLANATION TO SECTION 37(1) OF THE ACT IN THE HANDS OF ASSESSEE. THE ASSESSING OFFICER PRESUMED THAT IN VIEW OF THE CIRCUMSTANCES THE ASSESSEE HAD INCURRED THE EXPENDITURE OF KICKBACKS AND DISALLOWED UNDER SECTION 69C OF THE ACT. THE ASSESSING OFFICER HAS NOT INVOKED THE PROVISIONS OF SECTION 37(1) OF THE A CT OR EXPLANATION TO SECTION 37(1) OF THE ACT WITH REGARD TO THE COMMISSION PAYMENT BEING MADE TO KME BUT HAS MADE THE DISALLOWANCE UNDER SECTION 69C OF THE ACT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS PLACED RELIANCE ON SERIES OF DECIS IONS IN THIS REGARD AND APPLYING THE SAME THERE IS NO BASIS FOR MAKING THE SAID DISALLOWANCE UNDER SECTION 69C OF THE ACT. IT IS SETTLED LAW THAT FOR INVOKING PROVISIONS OF SECTION 69C OF THE ACT THE PRIMARY BURDEN THAT THE ASSESSEE IN FACT AND HAS ACTU ALLY 69C OF THE ACT THE PRIMARY BURDEN THAT THE ASSESSEE IN FACT AND HAS ACTU ALLY INCURRED THE EXPENDITURE IS ON REVENUE AND THEN THE ONUS SHIFTS TO ASSESSEE TO EXPLAIN THE SOURCE. A ) KRISHNA TEXTILES VS. CIT REPORTED IN 310 ITR 227 (GUJ) B ) ACIT VS. SHAHZAD QADIR REPORTED IN 3 ITR (TRIB) 177 (MUM) 70 . AS PER JUDICIAL PRECEDENTS IT IS SETTLED LAW THAT FOR INVOKING PROVISIONS OF SECTION 69C OF THE ACT THE PRIMARY BURDEN IS UPON THE REVENUE TO ESTABLISH THAT THE ASSESSEE IN FACT HAD ACTUALLY INCURRED THE EXPENDITURE AND THEREAFTER THE ONUS SHIFTS TO THE ASSESSEE TO EXPLAIN THE SOURCE OF SAME. WHERE THE EXPENDITURE IS ACTUALLY INCURRED ON ACCOUNT OF AFTER SALES SERVICE AND RECORDED IN THE BOOKS OF ACCOUNT THEN PRESUMPTION CANNOT BE RAISED AGAINST THE ASSESSEE FOR APPLICABILITY OF SECTION 69C OF THE ACT AND ACCORDINGLY WE ALLOW THE C LAIM OF ASSESSEE AND DELETE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 72 THE ADDITION MADE ON ACCOUNT OF UNEXPLAINED EXPENDITURE UNDER SECTION 69C OF THE ACT. 71 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE HAD PLACED RELIANCE ON THE RATIO LAID DOWN BY DELHI BENCH OF TRIBUNAL IN HERSH W. CHADHA VS. DDIT (SUPRA) UNDER WHICH THE ADDITION WAS MADE IN THE HANDS OF ASSESSEE ON THE BASIS OF BOFORS REPORT. THE SAID REPORT WAS AT THE BEHEST OF GOVERNMENT OF INDIA OFFICIALLY AND WAS RECEIVED THROUGH OFFICIAL AND DIPLOMATIC CHANNEL S AND WAS NOT C HALLENGED BY THE ASSESSEE BEFORE THE JOINT PARLIAMENTARY COMMITTEE AND WAS ACCEPTED BY HIM. UNDER SUCH CIRCUMSTANCES THE ADDITION WAS MADE IN THE HANDS OF SHRI HERSH W. CHADHA ON THE 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 REPO RT CANNOT BE THE BASIS FOR PRESUMPTION THAT THE WAS APPEARING IN THE SAID REPO RT 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 O NUS WAS UPON THE ASSESSEE TO ESTABLISH THAT IT HAD NOT PAID ANY ADDITIONAL CHARGES FOR INLAND TRANSPORTATION FEES AND PAYMENTS MADE TO KME WERE NOT IN THE NATURE OF KICKBACKS FOR IG. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 73 REVENUE IN THE WRITTEN S UBMISSIONS HAS ENLARGED THE SCOPE OF ASSESSMENT MADE IN THE CASE OF ASSESSEE. THE ASSESSEE HAS TIME AND AGAIN STRESSED THAT AS PER THE TERMS OF CONTRACT IT HAD SUPPLIED THE GOODS AT BAGHDAD FOR WHICH IT HAD SEPARATELY PAID FOR TRANSPORT THROUGH SEA AND ON ACCOUNT OF INLAND TRANSFER OF GOODS WITHIN IRAQ NO ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT OF ITF. WITH REGARD TO SERVICES OF ASSF THE ASSESSEE HAS EXPLAINED THAT THE SAID SERVICES HAD TO BE PROVIDED BY ITS AGENT AND IN SUCH C IRCUMSTANCES THERE IS NO NECESSITY TO ESTABLISH WHETHER ANY SERVICES WERE ACTUALLY RENDERED BY THE ASSESSEE WITH REGARD TO ASSF. THE FACTS AND ISSUE RAISED IN THE CASE OF KIRLOSKAR OIL ENGINES LTD AND THE ADDITION MADE BY THE ASSESSING OFFICER STANDS ON A DIFFERENT FOOTING THAN THE ADDITION MADE IN THE CASE OF KIRLOSKAR BROTHERS LTD. FIRST THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WHILE ARGUING THE APPEAL HAD ELABORATELY TOOK US THROUGH THE ORDER S OF CIT(A) IN THE CASE OF KIRLOSKAR BROTHER S LTD. AND HAD BROUGHT TO OUR KNOWLEDGE THE VARIOUS POINTS WITH REGARD TO APPOINTMENT OF AGENT AND THE PERIOD FROM WHICH THE SAID AGENCY HAD TO OPERATE AND ALSO POINTED OUT CERTAIN PERIOD FROM WHICH THE SAID AGENCY HAD TO OPERATE AND ALSO POINTED OUT CERTAIN DISCREPANCIES IN THE LETTER OF APPOINTMENT FILED BY THE ASSESSEE. HOWEVER IN THE FACTS OF KIRLOSKAR OIL ENGINES LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAD REPEATEDLY POINTED OUT THAT THE APPOINTMENT OF AGENT WAS FROM APRIL 1997 WHICH WAS MUCH BEFORE THE SANCTIONS IMPOSED BY UN AND THE AGENT APPOINTED BY T HE ASSESSEE HAD IN ADDITION OBTAINING THE ORDERS WAS ALSO TO LOOK AFTER AFTER SALES SERVICE OF THE PRODUCTS SOLD THROUGH HIM FOR SUCH SERVICES PROVIDED BY THE AGENT COMMISSION @ UPTO 12.5% WAS BEING PAID AND THE SCOPE OF AGREEMENT WAS FOR EXPORTS TO DIF FERENT COUNTRIES OF MIDDLE EAST. FIRST OF ALL THE COMMISSION PAID @ 12.5% WAS HIGHER THAN THE COMMISSION WHICH WAS REQUIRED TO BE PAID AS PER VCR I.E. 10% ON FOB VALUE. SECONDLY THE ASSESSEE WAS PAYING THE SAID COMMISSION FOR DIFFERENT COUNTRIES AT THE SAME RATE UP TO THE EXTENT OF 12.5% AND NO EXTRA COMMISSION WAS PAID WITH REGARD TO EXPORTS TO IRAQ. ACCORDINGLY THE ARGUMENTS MADE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 74 THE REVENUE ARE NOT RELEVANT FOR 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 TH E 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 FACTUA LLY 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 73. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE HAD PLACED RELIANCE ON THE ORDER S OF TRIBUNAL IN THE CASE OF SISTER CONCERN OF ASSESSEE AND ALSO IN THE CASE OF ASSESSEE WHEREIN THE CLAIM OF ASSESSEE OF COMMISSION PAYMENTS WAS NOT ALLOWED. WE HAVE GONE THROUGH THE SAID DECISIONS OF PUNE BENCH OF TRIBUNAL AND THE FACTS AND ISSUE BEFOR E THE TRIBUNAL IN THE SAID CASES 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 VIDE ORDERS DATED 24.03.2006 AND 23.03.2006 ARE AT VARIANCE AND THE SAID PROPOSITION IS NOT APPLICABLE. ANOTHER STRONG RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS ON CIPLA LTD. (SUPRA) WHEREIN ISSUE OF PAYMENT OF ASSF CHARGES WAS DECIDED AGAINST THE ASSESSEE. IN THE FACTS OF THE SAID CASE THE ASSES SEE HAD ADMITTED TO THE SAID PAYMENT AND HENCE THE DISALLOWANCE. THE FACTS ARE AT VARIANCE TO THE FACTS BEFORE US AND HENCE THE SAID RATIO IS NOT APPLICABLE. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 75 74. ANOTHER POINT WHICH WAS REFERRED TO BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE WAS THE FINDING OF VCR IN VOL - I PAGES NUMBERS 534 OF 623 (PARA HUMANITARIAN TABLES) WHICH STATES AS UNDER: TABLES 6 7 AND 8 PROVIDE INFORMATION ON HUMANITARIAN GOODS TRANSACTION. WHEN REVIEWING THE INFORMATION PRESENTED IN THESE TABLES IT IS IMPOR TANT TO NOTE THAT THE COMMITTEE HAS NOT BEEN ABLE TO OBTAIN A COMPLETE SET OF RECORDS OF KICKBACKS LEVY AND PAYMENT DATA FROM ALL IRAQI MINISTRIES THAT WERE INVOLVED IN THE PURCHASE OF HUMANITARIAN GOODS UNDER THE PROGRAMME. ACCORDINGLY THESE TABLES REFLE CT A DISTINCTION BETWEEN PROJECTED KICKBACKS FIGURES AND ACTUAL KICKBACKS FIGURE. A PROJECTED KICKBACK FIGURE INDICATES THAT THE EVIDENTIARY BASIS FOR THE CONCLUSION THAT THERE WAS A KICKBACK PAID IS IRAQS UNIFORM POLICY OF REQUIRING THE PAYMENT OF KICKBACKS DURING CERTAIN TIME PERIODS UNTIL JULY 2003 WHEN THE COALITION PROVISIONAL AUTHORITY REDUCED ALL CONTRACTS TO ELIMINATE ESTIMATED KICKBACK AMOUNTS. AN ACTUAL AMOUNT REFLECTS THE FACT THAT THE COMMITTEE HAS CONTRACT SPECIFIC PAYMENT DATA FRO M RELEVANT MINISTRY FROM BANKING INSTITUTION OR FROM THE SUPPLIER ITSELF OR ITS COLLECTION / SHIPPING AGENT. 75 . FURTHER HUMANITARIAN TABLES A SOURCE OF INFORMATION VIDE VO - I PAGE 535 OF 623 WHICH STATES AS UNDER: THE COMMITTEES EVIDENCE CONFIRM ED THE EXISTENCE OF THE POLICY REQUIRING THE PAYMENTS OF KICKBACKS. WHERE THE COMMITTEE DID NOT HAVE ACCESS TO CERTAIN MINISTRY AND BANKING INFORMATION THE AMOUNT OF ILLICIT KICKBACK AND FEES PAID FOR MANY OF THE SUPPLIERS WAS PROJECTED BASED ON GOVT. OF IRAQ DIRECTIVES OTHER MANY OF THE SUPPLIERS WAS PROJECTED 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. 7 6 . FURTHER QUANTIFICATION OF ILLICIT PAYMENTS OF AFTER SALES SERVICES FEES A S 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 PER TAINING 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 R ECORDS. 7 7 . 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 BY THE SUPPLIER FOR WHICH DIRECT OR INDIRECT EVIDENCE OF PARTICIPATION WAS FOUND. THE TABLE ALSO QUANTIFIES WHERE POSSIBLE THE AGGREGATE DOLLAR AMOUNT OF THE SOLICITATION AND PAYMENT. THE TABLE ALSO PROVIDES THE NATURE OF ANY RESPONSE FROM EACH COMPANY TO THE COMMITTEES LETTER OF NOTICE. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 76 TABLE - 8 EXPANDS ON THE INFORMATION PROVIDED IN TABLE - 7 LISTING THE SUPPLIER EACH INDIVIDUAL CONTRACT FOR WHICH A KICKBACK PAYMENT WAS MADE AND PROVIDING AN ESTIMATE OF THE AMOUNTS IMPOSED AND PAID. THE AMOUNTS ARE BASED ON EITHER ACTUAL OR PROJECTED DATA. THE TABLE IDENTIFIES TYPE OF EVIDENCE RELIED UPON AND INDICATES WHETHER THE AMOUNTS ARE BASED ON ACTUAL DATA OR WERE PROJECTED BY THE COMMITTEE. --- TABLE - 8 REFERENCES PROJECTED ETC. FOLLOWING REFERENCES ARE APPEARING IN THE TABLE - 8 AY 2000 - 01 REFERENCE + & 8 AY 2002 - 03 REFERENCE 5 5* + & 8 THE FOOTNOTE TO THE TABLE HAS PROVIDED THE MEANING OF THESE REFERENCES AS FOLLOWS: + REPRESENTS CONTRACTS WHERE INLAND TRANSPORTATION WAS REQUIRED BUT NO SPECIFIC INFORMATION WAS AVAILABLE. 8 PROJEC TED INLAND TRANSPORTATION FEES BASED ON GOVT OF IRAQ POLICY DOCUMENTS . 5 MINISTRY OF FINANCIAL DATA * PARTIALLY CONFIRMED BY BANK INFORMATION. 7 8 . THE ABOVE SAID OBSERVATIONS OF VCR CANNOT BE THE BASIS FOR INVOKING THE PROVISIONS OF SECTION 69C OF THE ACT ESPECIALLY IN THE FACTS OF THE PRESENT CASE WHERE MAJORITY OF T HE CONTRACTS WERE PRIOR TO THE PERIOD MENTIONED IN VCR. WHERE MAJORITY OF T HE CONTRACTS WERE PRIOR TO THE PERIOD MENTIONED IN VCR. SECONDLY THE ASSESSEE ALREADY HAD SUBSISTING CONTRACT WITH KME UNDER WHICH IN RESPECT OF ALL EXPORTS TO VARIOUS OTHERS COUNTRIES INCLUDING IRAQ COMMISSION WAS PAID @ UPTO 12.5% WHEREIN THE SAID AGE NT HAD TO PROVIDE AFTER SALES SERVICE ALSO. NO EXTRA COMMISSION WAS PAID IN RESPECT OF EXPORTS TO IRAQ. THE ASSESSEE HAS TIME AND AGAIN STRESSED THAT THE PAYMENTS WERE MADE THROUGH NORMAL BANKING CHANNEL THROUGH AUTHORIZED FOREIGN EXCHANGE DEALERS AND NO T 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 MA DE ON ACCOUNT OF UNEXPLAINED EXPENDITURE OF RS. 1 47 58 950/ - . 7 9 . ANOTHER ARGUMENT OF LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US WAS THAT SINCE THE VCR WAS NOT CONFRONTED BY THE ASSESSING OFFICER ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 77 DURING THE COURSE OF ASSESSMENT PROCEED INGS 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 ME E T THIS OBJECTION BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE 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 RS.1.47 CRORES. THE GROUNDS OF APPEAL NO.2 TO 4 RAISED B Y 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 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 - 03 ARE IDENTICAL TO THE FACTS AND IN ISSUE IN ITA NO.1170/PN/2011 AND FOLLOWING THE SAME PARITY OF REASONING WE ALLOW THE GROUND S OF APPEAL NO.2 TO 4 RAISED BY THE ASSESSEE IN ITA NO.1171/PN/2011 . 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. 81. THE FACTS AND ISSUE IN ITA NOS.1524/PN/2011 TO 1526/PN/2011 RELATING TO ASSESSMENT YEARS 2002 - 03 TO 2004 - 05 IN THE CASE OF MATHER & PLATT PUMPS LTD. ARE IDENTICAL TO THE FACTS AND ISSUE IN ITA NO.1170/PN/2011 AND OUR DECISIO N IN ITA NO.1170/PN/2011 SHALL APPLY MUTATIS MUTANDIS TO ITA NOS.1524/PN/2011 TO 1526/PN/2011 . ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 78 82. IN ORDER TO ADJUDICATE THE ISSUE RAISED BY THE ASSESSEE IN THE APPEALS OF M/S. KIRLOSKAR BROTHERS LTD. THE ASSESSEE CLAIMS THAT IT HAD ENTERED INTO AN A GREEMENT WITH THE STATE COMPANY FOR AGRICULTURAL SUPPLIES IRAQ DATED 30.04.2001 FOR SUPPLY OF 1465 NUMBER S OF WATER PUMP SETS WITH ENGINES AND ACCESSOR IES. THE COPY OF CONTRACT IS PLACED AT PAGES 37 TO 45 OF THE PAPER BOOK . CONSEQUENT TO THE SAID UNDER STANDING THE ASSESSEE HAD SUPPLIED THE PUMP SETS TO IG AS DETAILED HEREUNDER: - INVOICE NO. DATE QTY. AMOUNT GBP D - 30 31.07.2001 320 265763.20 D - 40 31.08.2001 400 332204.00 D - 43 21.09.2001 480 398644.80 D - 48 28.09.2001 264 21925 4.64 83. THE CASE OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES WAS THAT THE SAID CONTRACT WAS ENTERED INTO WITH THE HELP OF THEIR DISTRIBUTOR KME. THE ASSESSEE TIME AND AGAIN HAD STRESSED THAT IT HAD CONTINUED BUSINESS TRANSACTIONS WITH KME SINCE 1994 UNDER WHICH SUPPLIES WERE MADE TO VARIOUS MIDDLE EAST COUNTRIES. HOWEVER NO DISTRIBUTORSHIP AGREEMENT FOR 1994 HAS BEEN PLACED ON RECORD OR BROUGHT TO OUR KNOWLEDGE . THE ASSESSEE HAS PLACED RELIANCE ON THE DISTRIBUTORSHIP AGREEMENT WHICH IS PLACED AT P AGES 51 TO 54 OF THE PAPER BOOK. THE PERUSAL OF THE SAME REFLECTS THAT THE ASSESSEE APPOINTS KME AS THEIR DISTRIBUTOR FOR THE TERRITORY MENTIONED 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 IRA Q IS MISSING HERE. THE PRODUCTS TO BE COVERED WERE PUMPS VALVES AND HERMETIC COMP RESSORS 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 79 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 TH E 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 THE DATE ON WHICH IT WAS EXECUTED. THE ASSESSEE FURTHER CLAIMED THAT THIS AGREEMENT WAS RENEWED BUT THE COP IES OF THE NEXT RENEWAL ARE NOT AVAILABLE . O N PAGES 55 TO 58 OF THE PAP ER BOOK T HE ASSESSEE HAS PLACED ON RECORD THE DISTRIBUTION AGREEMENT ON WHICH DATE 03.04.2003 IS MENTIONED. THE AGREEMENT IS TERMED AS DISTRIBUTORSHIP AGREEMENT UNDER WHICH THE ASSESSEE IS PLEASED TO APPOINT DISTRIBUTOR FOR THE DISTRIBUTION AND SERVICIN G OF PRODUCTS. HOWEVER THE NAME OF DISTRIBUTOR IS MISSING AT THE START OF AGREEMENT. THEREAFTER THE LIST OF TERRITORY IS MENTIONED WHEREIN IRAQ IS ALSO INCLUDED. SIMILARLY AS IN OTHER AGREEMENTS REFERRED MENTIONED WHEREIN IRAQ IS ALSO INCLUDED. SIMILARLY AS IN OTHER AGREEMENTS REFERRED THE PRODUCTS COVERED ARE MENTIONED AND PRICES AND INVOICING TERMS MENTION ING THE SAME TERMS FOR SHIPMENT AND REMITTANCES ARE ALSO MENTIONED. THE TERM OF PRE AND AFTER SALES SERVICES AND WARRANTY ADMINISTRATION ARE ALSO INCORPORATED. THE NEXT CLAUSE OF PAYMENT OF COMMISSION @ 12% TO KME FOR THE EXPO RTS IN COUNTRIES LISTED IN THE TERRITORY AREA UNDER THE CLAUSE VALIDITY IT IS MENTIONED THAT THIS AGREEMENT WILL COME INTO FORCE ON THE DATE IT IS SIGNED AND WILL BE VALID TILL 31.03.2005 . THEREAFTER IT IS SIGNED BY THE RESPECTIVE PERSONS FOR THE ASSES SEE AND KME. 84. ON PERUSAL AND ANALYZING THE TWO AGREEMENTS IT IS APPARENT THAT IN THE FIRST AGR EEMENT FIRST OF ALL UNDER THE TERRITORY COUNTRY IRAQ IS NOT COVERED. SECONDLY FOR ACTING AS DISTRIBUTOR NO TERMS VIS - - VIS COMMISSION DUE AND TO BE P AID IS AGREED UPON. THIRDLY THE SAID AGREEMENT IS NOT DATED EXCEPT FOR MENTIONING THE VALIDITY OF THE PERIOD OF AGREEMENT. NOW COMING TO THE SECOND AGREEMENT WHICH IS DATED ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 80 03.04.2003 WHEN THE DISTRIBUTOR IS BEING APPOINTED ITS NAME IS MISSING IN THE TOTAL AGREEMENT EXCEPT THE SIGNATORY SIGNING ON BEHALF OF KME. FURTHER THIS SECOND AGREEMENT IS AN AGREEMENT TO APPOINT THE DISTRIBUTOR PERSE AND IT DOES NOT REFER TO THE APPOINTMENT OF DISTRIBUTOR BY WAY OF ANY EARLIER AGREEMENT EVEN IN THE VALIDITY C LAUSE IT IS MENTIONED THAT THE SAME IS IN FORCE ON THE DATE IT IS SIGNED AND WOULD BE VALID TILL 31.03.2005. NO REFERENCE IS MADE TO ANY EARLIER AGREEMENT AND / OR IT IS EXTENSION BY WAY OF THIS DISTRIBUTION AGREEMENT. IN THIS AGREEMENT FOR THE FIRST T IME A TERM WITH REGARD TO PAYMENT OF COMMISSION @ 12% FOR KME IS MENTIONED WHICH AS POINTED OUT ABOVE IS MISSING FROM THE EARLIER AGREEMENT. THE ASSESSEE HAS PLACED ON RECORD A LETTER OF RENEWAL OF DISTRIBUTORSHIP AGREEMENT DATED 31.03.2001 WHEREIN TH E 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 UP ON. 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 RS. 18 61 920/ - AND SUM OF RS. 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 RELIAN CE 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 WORK OUT TO GBP 124576 APPROX. KME TALKS OF THE SERVICES RENDERED BY AL AZHAR TRADING CO. AND BY THEM IN EXECUTING AND FOLLOW UP OF THE ORDERS AND TALKS ABOUT THE BALANCE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 81 PAYMENT OF USD 3697 AND EARLY REMITTANCE OF THE AMOUNT WAS ASKED FOR. IN THE SAID LETTER THE AMOUNT PAYABLE TO AL AZHAR TRADING CO. FOR LIAISONING SERVICES WAS ASKED TO BE PAID TO THEM AS PER DETAILS OF BANK ACCOUNT GIVEN IN THE SAID L ETTER ITSELF. THE COPY OF THE SAID LETTER IS PLACED AT PAGE 62 OF THE PAPER BOOK. PAGE 63 OF THE PAPER BOOK IS DEBIT ADVI C E DATED 01.02.2002 UNDER WHICH THE COMMISSION REMITTED THROUGH EEFC ACCOUNT TO AL AZHAR OF 1861920 AND TO KME OF 178676 IS MENTIONE D. THEREAFTER THERE IS A LETTER BY THE ASSESSEE ADDRESSED TO THE BANK OF INDIA DATED 14.01.2002 WHEREIN THE ASSESSEE TALKS OF THE REMITTANCE OF GBP OF 124576 TO AL AZHAR ON ACCOUNT OF COMMISSION TO BE PAID FROM EEFC ACCOUNT. THE COPY OF THE SAID LETTER IS PLACED AT PAGE 64 OF THE PAPER BOOK ALONG WITH DETAILS OF EXPORTS MADE TO MINISTRY OF AGRICULTURE FOR PAYMENT OF COMMISSION TOTALING GBP OF 124576 WHICH IS PLACED AT PAGE 65 OF THE PAPER BOOK. ALL THESE DOCUMENTS ARE FILED BY THE ASSESSEE IN ITS PAPE R BOOK. FROM THE ABOVE SAID EVIDENCE IT IS NOT CLEAR AS TO WHY THE SAID AMOUNT IS BEING PAID TO AL AZHAR AND KME; WHETHER THE SAME IS ON ACCOUNT OF TRANSPORTATION CHARGES OR AFTER SALES SERVICE. IN THE EVIDENCE FILED BY THE ACCOUNT OF TRANSPORTATION CHARGES OR AFTER SALES SERVICE. IN THE EVIDENCE FILED BY THE ASSESSEE REFERS IS TO LIAISON SERVICES / SERVICES / COMMISSION BUT THE ASSESSEE HAS FAILED TO ESTABLISH ITS CASE IN THIS REGARD. SECONDLY IT MAY ALSO BE NOTED THAT IN THE INVOICES RAISED BY THE ASSESSEE COPIES OF WHICH ARE PLACED AT PAGES 11 TO 14 OF THE PAPER BOOK IT IS CLEARLY M ENTIONED THAT THE GOODS ARE DISPATCHED TO CIF BAGHDAD. IN OTHER WORDS THE ASSESSEE HAD TO DELIVER THE GOODS AT BAGHDAD. 86. FURTHER I N ASSESSMENT YEAR 2003 - 04 THE ASSESSEE HAD REMITTED SUM OF RS.1 57 09 142/ - TO M/S. ALIA AGAINST SERVICE CHARGES. TH E CLAIM OF THE ASSESSEE WAS THAT THE SAID REMITTANCES WERE ON ACCOUNT OF AGREEMENT BETWEEN THE ASSESSEE AND KME UNDER WHICH SALES WERE MADE TO VARIOUS COUNTRIES INCLUDING IRAQ. THE ASSESSEE FURTHER CLAIMS THAT THE SAID REMITTANCES TO ALIA WERE MADE AFTER TAKING THE GOVERNMENT OF INDIAS SANCTIONS UNDER THE GU IDELINES ISSUED UNDER FEMA. FOR THE PAYMENT OF AMOUNT TO ALIA THE ASSESSEE CLAIMS THAT THE SAME WAS ALSO AT THE ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 82 BEHEST OF KME WHO WAS APPOINTED AS THEIR DISTRIBUTOR. IN THIS REGARD THE ASSESSEE H AS 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 T HE 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 FR OM 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 REMITTANC E 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 REMITTANCE FOR PAYMENT TOWARDS SERVICE CHARGES TO ALIA IS DATED 12.11.2002 IS PLACED AT PAGES 113 AND 114 OF THE PAPER BOOK. THE ASSESSEE CLAIMS THAT THE PAYMENTS TO ALIA WERE MADE AGAINST THE TRANSPORTATION COST AND HENCE THE S AME ARE TO BE ALLOWED AS DEDUCTION. ONE MORE ASPECT TO BE CONSIDERED IS THE INVOICE RAISED BY THE ASSESSEE COPIES OF WHICH ARE FILED BY THE ASSESSEE DURING THE COURSE OF HEARING OF THE PRESENT APPEAL UNDER WHICH IT IS CLEARLY MENTIONED THAT PORT OF LOAD ING IS M UMBAI PORT OF DISPATCH IS UMM QASER AND FINAL DESTINATION IS BAGHDAD. THE TERMS OF DELIVERY AND PAYMENTS ARE CIF BAGHDAD. SIMILAR ARE THE TERMS FOR FOUR INVOICES RELATING TO ASSESSMENT YEAR 200 1 - 0 2 WHICH ARE PLACED AT PAGES 11 TO 1 4 OF THE PAP ER BOOK. AT THIS JUNCTURE IT MAY BE KEPT IN MIND THAT WHILE ARGUING THE APPEAL IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE TIME AND AGAIN HAD POINTED THAT IT HAD NOT PAID ANY ITF SINCE THE TERMS OF DE LIVERY WERE CIF BAGHDAD. IN OTHER WORDS THE GOODS HAD TO BE DELIVERED TO BAGHDAD. HOWEVER IN THE CASE OF M/S. KIRLOSKAR BROTHERS LTD. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 83 THE ASSESSEE CLAIMS THAT THE AMOUNT HAS BEEN PAID TO AL AZHAR TRADING CO. FOR RENDERING SERVICES FOR EXECUTION AND F OLLOW UP OF THE CONTRACT. WITH REGARD TO ALIA THE CLAIM OF ASSESSEE IS THAT THE AMOUNT HAS BEEN PAID TO ALIA FOR TRANSPORTATION OF GOODS WHICH ARE ALSO TERMED AS SERVICE CHARGES. CONSIDERING THE GAMUT OF EVIDENCES FILED BY THE ASSESSEE I.E. APPOINTMENT OF KME AS DISTRIBUTOR AND THE COMMUNICATION BETWEEN KME AND THE ASSESSEE FOR THE REMITTANCE OF SO CALLED SERVICE CHARGES TO AL AZHAR IN THE FIRST YEAR AND ALIA IN THE SECOND YEAR WHEREIN PAYMENT WAS MADE TO AL AZHAR WITHOUT THERE BEING ANY UNDERSTANDING BETWEEN THE ASSESSEE AND AL AZHAR AND PAYMENT WAS MADE TO ALIA ON ACCOUNT OF TRANSPORTATION SERVICES . THE CASE OF THE ASSESSEE BEFORE US WAS THAT THE UNDERSTANDING WAS THROUGH ITS DISTRIBUTOR KME. IN THE FIRST INSTANCE AS POINTED OUT EARLIER THE SO CAL LED DISTRIBUTORSHIP AGREEMENT WITH KME FILED BY THE ASSESSEE DO NOT INSPIRE CONFIDENCE. IN THE FIRST AGREEMENT WHICH IS NOT DATED AND FOR THE PERIOD FROM 01.01.1997 TO 31.12.1998 FOR THE SERVICES TO BE RENDERED BY KME THERE IS NO TERM MENTIONING THE COM MISSION. FURTHER THE ASSESSEE HAS FILED A LETTER DATED 31.03.2001 FOR THE COM MISSION. FURTHER THE ASSESSEE HAS FILED A LETTER DATED 31.03.2001 FOR THE RENEWAL OF DISTRIBUTION AGREEMENT WHERE THE EARLIER AGREEMENT WAS EXPIRING ON 31.03.2001 AND AS PER RENEWAL THE TENURE OF AGREEMENT WAS NOW VALIDATED UP TO 31.03.2003. ONCE THE AGREEMENT EXPIRED ON 31.03.2003 THE RE 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 . W HEREAS 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 D ECEMBER 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 BEF ORE US ARE ENDING 31.03.2003 AND THE DISTRIBUTORSHIP AGREEMENT IN WHICH TERRITORY OF IRAQ IS MENTIONED ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 84 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 THI S 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 DISTRIBUTORSHIP AGREEMENT DATED 03.04.2003 THE TERRITORY OF IRAQ IS MENTIONED. TH E ASSESSEE HAS NOT FILED ANY EVIDENCE IN THIS REGARD. THE SECOND EVIDENCE WHICH HAS BEEN FILED BY THE ASSESSEE IS THE LETTER DATED 02.01.2002 I.E. COMMUNICATION BY KME TO THE ASSESSEE TO RELEASE THE PAYMENT TO AL AZHAR FOR LIAISONING SERVICES CARRIED ON B Y THE SAID CONCERN. IN THE SAID LETTER THERE IS REFERENCE TO AGREEMENT OF MARCH 2001 AND APRIL 2003. TWO POINTS HAVE TO BE KEPT IN MIND ARE THAT THE RENEWAL LETTER WAS DATED 31.03.2001 U NDOUBTEDLY THAT COULD BE REFERRED TO IN THE LETTER DATED 02.01.2 002. THE SAID RENEWAL OF AGREEMENT OF MARCH 2001 WAS VALID UP TO 31.03.2003. FIRST OF ALL HOW CAN KME ON 02.01.2002 BE AWARE THAT THE SECOND AGREEMENT WOULD BE EXECUTED IN APRIL 2003 WHICH IS COMING TO END BY 31.03.2003. THE SAID AGREEMENT REFERRED T O BY THE ASSESSEE IS DATED 03.04.2003. 31.03.2003. THE SAID AGREEMENT REFERRED T O BY THE ASSESSEE IS DATED 03.04.2003. HOWEVER THE SAME IS MENTIONED IN A LETTER WHICH WAS SIGNED ON JANUARY 2002. THE SAID LETTER REFERS TO MARCH 2001 AND APRIL 2003 AGREEMENTS WHEREIN MARCH 2001 WAS ONLY AN EXTENSION LETTER AND APRIL 2003 WAS AN AGREEMENT PERSE . ANOTHER POINT TO BE KEPT IN MIND IS THAT FOR THE PERIOD APRIL 2001 TO MARCH 2002 THE PAYMENT HAS BEEN MADE TO AL AZHAR FOR SERVICE CHARGES AND IN THE NEXT YEAR I.E. APRIL 2002 TO MARCH 2003 THE PAYMENT HAS BEEN MADE TO ALIA. BUT K ME IN A LETTER DATED 02.01.2002 MAKES REFERENCES TO AGREEMENT OF MARCH 2001 AND APRIL 2003 VIS - - VIS SERVICES RENDERED BY AL AZHAR. IN THE ENTIRETY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES THE SAID LETTER DATED 02.01.2002 IS ANTEDATED AND CANNOT BE RE LIED ON . 87. ANOTHER ASPECT OF THE ISSUE IS THAT IN RESPECT OF PAYMENT TO ALIA THE SAME WAS RELEASED @ 10% TOWARDS TRANSPORTATION CHARGES FROM UMM QASER TO BAGHDAD. ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 85 THE SAID PAYMENT ADMITTEDLY WAS TO BE PAID IN ORDER TO EN ABLE KME TO PROCESS THE CASE FURTHER AND TO CLEAR THE REMITTANCES FOR THE SUPPLIES THROUGH LETTER OF CREDIT WHICH IS MENTIONED IN THE COMMUNICATION MADE BY KME TO THE ASSESSEE . IN OTHER WORDS THE SAID PAYMENT AS NOTED BY THE VCR WAS TO BE PAID BEFORE THE EXPORT PROCEEDS ARE RE LEASE D TO THE ASSESSEE. WHILE DECIDING THE ISSUE IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. WE HAVE TAKEN NOTE OF THE DECISION OF KOLKATA BENCH OF TRIBUNAL IN DCIT VS. RAJRANI EXPORTS PVT. LTD. (SUPRA) WHICH IN TURN HAS BEEN APPROVED BY THE HONBLE CALCUTTA HIGH COURT (SUPRA) WHEREIN 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 U S ON THE OTHER HAND IS THAT THE SERVICES ARE THROUGH ITS DISTRIBUTOR KME WHO IN TURN 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 AGREEME NT 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 YEAR S 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 MADE BY THE ASSESSEE TO AL AZHAR FOR ALLEGED S ERVICES AND TO ALIA FOR TRANSPORTATION SERVICES AND BALANCE TO KME ARE NOT SUPPORTED BY PROPER EVIDENCE AND IN THE ABSENCE OF ASSESSEE HAVING NOT DISCHARGED ITS ONUS IN THIS REGARD THE SAID EXPENDITURE IS NOT ALLOWABLE AS BUSINESS EXPENDITURE IN THE HANDS OF ASSESSEE UNDER SECTION 37(1) OF THE ACT. ADMITTEDLY THE SAID EXPENDITURE HAS BEEN INCURRED ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 86 FOR PAYMENT OF KICKBACKS TO THE IG AND THE SAME IS HIT BY EXPLANATION TO SECTION 37(1) OF THE ACT. THE VCR IN ANNEXURE TO THE REPORT UNDER TABLE 8 HAS REPORTED THE EXACT VALUE O F EXPORTS MADE BY THE ASSESSEE IN RESPECTIVE YEARS AND THE PAYMENTS TO THE ALLEGED FRONT COMPANIES. ON THE OTHER HAND IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. THE VCR TALKED OF PART OF EXPORTS VALUE UNDERTAKEN BY THE ASSESSEE AS AGAINST WHICH THE ASSE SSEE HAD MADE HIGHER EXPORTS TO IRAQ. OUR DECISION IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. WOULD NOT APPLY TO THE FACTS OF ASSESSEE IN KIRLOSKAR BROTHERS LTD. AS TWO STANDS ON DIFFERENT FACTS. IN KIRLOSKAR OIL ENGINES LTD. THE ASSESSEE THEREIN HAD MAD E THE PAYMENTS TO ITS DISTRIBUTOR WHO WAS APPOINTED IN 1997 TO LOOK AFTER ITS EXPORTS IN THE MIDDLE EAST COUNTRIES WHICH INCLUDED IRAQ AND THE TOTAL SERVICE CHARGES WERE PAID TO KME AND NO EVIDENCE OF ANY PAYMENTS BEING MADE TO THE FRONT COMPANIES OF THE I RAQ REGIME WAS FOUND IN THE SAID CASE. HOWEVER IN THE FACTS OF THE PRESENT CASE BEFORE US THE 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 AND WHERE THE ASSESSEE HAS FAILED TO ESTABLISH WHETHER ANY SERVICES HAVE BEEN REND ERED BY THE SAID CONCERN S 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 AL IA 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 THE VALUE OF CONT RACT W HICH FINDS CLEAR MENTION IN VCR IS PAYMENT BY WAY OF KICKBACKS TO THE IG AND IS COVERED BY EXPLANATION TO SECTION 37(1) OF THE ACT AND THE SAME IS NOT ALLOWABLE AS DEDUCTION TO THE ASSESSEE. THIS IS A CASE WHERE THE PERSONS WERE AWARE THAT THE PAYM ENTS AS ASSF AND ITF WERE IN THE 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 87 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 S AKE 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 NOR MAL 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 W AS POINTED OUT THAT THE CIT(A) HAD ENLARGED THE SCOPE OF DISALLOWANCE WITHOUT AFFORDING ANY OPPORTUNITY OF HEARING TO THE ASSESSEE . T HE ASSESSEE IS AGGRIEVED BY THE RELIANCE PLACED UPON BY THE CIT(A) ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF MADDI VENKATARAMAN & CO. (P) LTD. (SUPRA) . W E FIND NO MERIT IN THE SAID ISSUE RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SINCE THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IS THE LAW OF LAND AND IT PREVAILS AT ALL TIM ES. ANOTHER ASPECT OF THE ISSUE IS THE DISALLOWANCE UPHELD BY THE CIT(A) FOR NON DEDUCTION OF TAX AT SOURCE. THE SAID ISSUE NOW BECOMES ACADEMIC SINCE WE HAVE ALREADY UPHELD THE ORDER OF CIT(A) IN RESPECT OF DISALLOWANCE UNDER EXPLANATION TO SECTION 37(1 ) OF THE ACT. THE ASSESSEE HAS TIME AND AGAIN STRESSED THAT THE NAME OF AL AZHAR WAS NOT MENTIONED IN VCR BUT THE ONUS WAS UPON THE ASSESSEE TO ESTABLISH THAT AL A ZHAR TRADING CO. HAD PROVIDED THE SERVICES TO THE ASSESSEE WHICH WARRANTED THE SAID PAYMENT TO IT AND ITS ALLOWABILITY IN THE HANDS OF ASSESSEE. THE COMPLETE CASE OF ASSESSEE IN THIS REGARD IS THE DISTRIBUTORSHIP AGREEMENT WITH KME UNDER WHICH THE SAID PAYMENT WAS MADE. WE HAVE ALREADY DECIDED THE SAID ISSUE WHEREIN THE SAID PAYMENT WAS TO B E MADE AS PER THE LETTER OF KME TO THE ASSESSEE DATED 02.01.2002 WHICH REFERS TO THE AGREEMENT OF MARCH 2001 AND APRIL 2003 WHICH ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 88 WE HAVE ALREADY HELD TO BE ANTEDATED. IN THE ABSENCE OF ASSESSEE HAVING NOT ESTABLISHED ITS CASE THE SAID DEDUCTION IS N OT TO BE ALLOWED IN THE HANDS OF ASSESSEE. THE ASSESSEE HAS STRESSED THAT SINCE THE SAID COMPANY WAS NOT TAINTED HENCE THE PAYMENT TO THEM COUL D NOT BE DISALLOWED BEING TAINTED. WE FIND NO MERIT IN SAID CLAIM OF ASSESSEE. 89. WITH REGARD TO ASSESSMENT IN ASSESSMENT YEAR 2003 - 04 THE ASSESSEE HAD POINTED OUT THAT THE FACTS WERE IDENTICAL TO ASSESSMENT YEAR 2002 - 03 WHEREIN THE PAYMENT WAS MADE TO ALIA HE HAD REFERRED TO THE BILL OF LADING AND FILED THE COPY OF INVOICE DURING THE COURSE OF HEARING. THE GOODS WERE TO BE DELIVERED TO CIF BAGHDAD I.E. TO THE PLACE OF IG . U NDER SUCH CIRCUMSTANCES THE PAYMENT MADE TO ALIA FOR TRANSPORT SERVICES IS FOR THE PURPOSE OTHER THAN THE TRANSPORT AND THE SAME AS POINTED OUT BY VCR IS ON ACCOUNT OF KICKBACKS TO THE IG AND HENCE THE SAME IS NOT ALLOWED IN THE HANDS OF ASSESSEE. THE PLEA OF LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THE CASE OF KIRLOSKAR OIL ENGINES LTD. WAS THAT NO DISALLOWANCE ON ACCOUNT OF UNEXPLAINED PAYMENT TO ANY FRONT COMPANY OF IG IS TO BE MADE IN THE HANDS OF ASSESSEE AS THE ONUS WAS TO DELIVER 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 ABSENC E 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 O NUS 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 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 89 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 EXCLUSIVELY FOR THE PURPOS E OF BUSINESS. APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE ONUS WAS UPON THE ASSESSEE TO ESTABLISH THAT THE SAID PERSONS HAD RENDERED SERVICES WHICH NECESSITATED THE PAYMENT OF COMMISSION TO THE SAID CONCERN. FURTHER VCR IN THIS REGARD REP ORTED THAT THE PERSONS MAKING SUPPLIES TO IRAQ WERE INDULGING IN PAYMENT OF KICKBACKS STANDS ESTABLISHED AGAINST THE ASSESSEE AND APPLYING THE SAID RATIO WE UPHOLD THE DISALLOWANCE MADE IN THE CASE OF ASSESSEE RELATING TO ASSESSMENT YEARS 2002 - 03 AND 2003 - 04. THE GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE IS DISMISSED. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE AGAINST REOPENING OF ASSESSMENT HAS NOT PRESSED AND HENCE THE SAME IS DISMISSED. 91. THE GROUNDS OF APPEAL NO.1 AND 2 RAISED BY THE A SSESSEE IN ASSESSMENT YEAR 2003 - 04 ARE IDENTICAL TO THE GROUNDS OF APPEAL NO.1 AND 2 RAISED IN ASSESSMENT YEAR 2002 - 03. THE ASSESSEE HAS NOT PRESSED GROUND OF APPEAL NO.1 AGAINST REOPENING OF ASSESSMENT AND THE SAME IS DISMISSED. THE ISSUE IN GROUND OF A PPEAL NO.2 IS IDENTICAL AND FOLLOWING THE SAME PARITY OF REASONING WE DISMISS THE GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE. IN ASSESSMENT YEAR 2003 - 04 THE ASSESSEE HAS RAISED GROUND OF APPEAL NO.3 AGAINST REJECTION OF CLAIM OF DEDUCTION UNDER SECTIO N 80IA OF THE ACT ON ACCOUNT OF INFRASTRUCTURE PROJECT WATER SUPPLY SCHEME DEVELOPED BY THE ASSESSEE FOR SARDAR SAROVAR NARMADA DAM PROJECT. 92. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE SAID ISSUE RAISED VIDE GROUND OF APPEAL NO.3 IS SQUARELY COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.657/PN/2010 ITA NOS. 1170 AND 1171 /PN/201 1 ITA NOS. 1524 TO 1526/PN/2011 ITA NOS.689 & 690/PN/2010 90 AND ITA NO.674/PN/2010 RELATING TO ASSESSMENT YEAR 2006 - 07 VIDE ORDER DATED 17.09.2014 FROM PARA 15 ONWARDS HAS DECIDED THE ISSUE OF ASSESSEE AND HAVE HELD THE ASSESSEE TO BE ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IA OF THE ACT. FOR THE SAKE OF BREVITY THE FINDINGS OF TRIBUNAL ARE NOT BEING REPRODUCED HERE IN. HOWEVER FOLLOWING THE SAME PARITY OF REASONING WE DIRECT THE ASSESSI NG OFFICER TO ALLOW THE CLAIM OF ASSESSEE OF DEDUCTION UNDER SECTION 80IA OF THE ACT. THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS THUS ALLOWED. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN ITA NO.689/PN/2010 ARE DISMISSED AND THE GROUNDS OF A PPEAL RAISED BY THE ASSESSEE IN ITA N O .690/PN/2010 ARE PARTLY ALLOWED. 93. IN THE RESULT APPEALS OF ASSESSEE IN ITA NOS. 1170/PN/2011 & 1171/PN/2011 ITA NOS.1524/PN/2011 TO 1526/PN/2011 AND IN ITA NO.690/PN/2010 ARE PARTLY ALLOWED AND THE APPEAL OF ASSES SEE IN ITA NO.689/PN/2010 IS DISMISSED. ORDER PRONOUNCED ON THIS 21 ST D AY OF OCTOBER 201 6 . SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; D ATED : 21 ST OCTOBER 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPEL LANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - V PUNE ; 4. / THE CIT - V PUNE ; 5. / DR A ITAT PUNE; 6. / GUARD FILE . / BY ORDER // TRUE COPY // / SR. PRIVATE SECRETARY / ITAT PUNE