By TIOL News Service

MUMBAI, AUG 22, 2017: THE issue before the Bench is - Whether the Explanation to Sec 37(1) gets attracted even if there is no specific material to suggest participation of the assessee in alleged kickbacks detailed by an international inquiry report. NO is the verdict.

Facts of the case:

The Assessee, a pharma company, had won the bid for Supply of medicines in North Iraq, raged in war. After the Gulf War, the USA had imposed trade sanctions against Iraq and the UN had initiated Oil-for-Food programme, whereby Iraq was given choice to decide the countries to whom it sold its oil. In this programme, it was only on a recommendation of the Reserve Bank of India, in the case of Indian Companies/entities, the UN Board instructed the designated banks, with whom the escrow funds were parked, to release the payments to be made to Indian Companies who were supplying goods to the Iraq Government.

For smooth conduct of its business the assessee had appointed a Jordanian company M/s Galala as its agent. The assessee paid commission on agreed basis. The payment of commission was as per UN sanctioned percentage of 10% of trade amount/invoice price.

However, in view of the Volcker Committee Report alleging instances of Iraq Govt officials seeking kickbacks from suppliers of goods, the AO decided to issue Sec 148 notice to the assessee. The CIT(A) confirmed the AO’s order but the Tribunal disagreed.

On appeal, the HC held that,

++ the assessee has claimed that it did not participate in any illicit payments concerning kickbacks. Further, the Assesee was never examined by the Volcker Committee. The Assessing Officer accepted this factual position, but went on and held that even if, the payments were made, to Jordan based Company post sanction of the Reserve Bank of India, but such payment has been made with illicit intention, thus, was against legal sanction and against law. Hence, the payment of Rs.2,88,22,428/- was held to be covered by the explanation to Section 37(1) of the Income Tax Act, 1961;

++ in this factual background, the Tribunal concluded that the facts as assumed by the Assessing Officer do not attract the explanation to Section 37(1) of the Income Tax Act;

++ the sum and substance of the lengthy discussion in the Tribunal's order is that even if what is alleged by the Assessing Officer and relying upon the report is taken as true and correct, still, the participation of the assessee was not established and proved. The assessee was not found to have made any kickbacks or payment of that nature which reached the Iraq Government and through the channels indicated in the Volcker Committee Report. There was no material of this nature in possession of the Assessing Officer against the assessee. It is in these circumstances that the Tribunal concluded, and essentially in the peculiar facts of the case of the assessee, that the assessee has not incurred any expenditure for any purpose which is an offence or which is prohibited by law. The essential ingredients of explanation below SubSection 1 of Section 37, therefore, were not attracted to the Assessee's payment made to M/s. Galala & Company in Jordon;

++ this is a finding of fact and based on the material placed before the Tribunal. We do not think that the Tribunal committed any error of law apparent on the face on record in reversing the view of the Assessing Officer. We do not think that the present Appeals of the Revenue raise any substantial questions of law.

(See 2017-TIOL-1618-HC-MUM-IT)