2016 (2) TMI 496 - AT - Income Tax

Payment of ASSF during the relevant financial period towards export of oil drilling equipments etc. - whetehr allowable expenditure u/s 37 - kick back - Held that - In the present case lower authorities have not brought out any allegation of illegal gratification or kick back payment or allegation of bogus payment by the assessee and as per proposition laid down by ITAT Kolkata in the case of Rajrani Exports (2012 (6) TMI 62 - ITAT Kolkata payment made to Iraqi Company for receiving services to facilitate export is allowable business expenditure and this fact is not relevant for making disallowance of such payment on the premise that such payment was passed on by Iraqi Company as kick back or illegal gratification to Iraqi authorities or any other entity or person. In the present case there is no such allegation of the revenue therefore the present assessee before us has a better case and does nothit by explanation to section 37(i) if the Act. Finally we are inclined to hold that the payment of ASSF made by the assessee during the relevant financial period towards export of oil drilling equipments etc. does not fall in the first category payments as per Volker Committee report and thus the same is allowable business expenditure and therefore we direct the AO to allow the same. - Decided in favour of assessee Profit element for the purpose of computing the adjusted profit u/s 80HHC - Held that - Conclusion of the CIT(A) in directing the AO to consider the only profit for the purpose of computing the adjusted profit u/s 80HHC of the Act is upheld - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of reopening assessment under Sections 147/148 of the Income Tax Act.
2. Disallowance of commission payments on sales to Iraq.
3. Adjustment of profits for the purpose of Section 80HHC of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening Assessment under Sections 147/148:
The assessee argued that the reopening of assessments for AY 2002-03 and 2003-04 was invalid as it was initiated after four years without any failure on the part of the assessee to disclose fully and truly all material facts. The assessee cited the Gujarat High Court's decision in Avni Exports, which declared the retrospective amendment to Section 80HHC unconstitutional. However, the revenue contended that since the original returns were processed under Section 143(1), the Assessing Officer (AO) had no occasion to form an opinion, and the first proviso to Section 147 was not applicable. The Tribunal upheld the revenue's position, stating that the AO was justified in reopening the assessments as the original returns were processed under Section 143(1) and not under Section 143(3).

2. Disallowance of Commission Payments on Sales to Iraq:
The AO disallowed the commission payments, including the After Sales Service Fee (ASSF), on the grounds that the identity of the agents remained unverifiable and the assessee failed to establish the services rendered by these agents. The CIT(A) granted partial relief but upheld the disallowance of Rs. 38,35,079/- related to ASSF, stating that the assessee could not correlate the sales of earlier years with such fees. The Tribunal found the CIT(A)'s observations factually incorrect, noting that the assessee had provided detailed documentation, including an affidavit from the Managing Director, confirming the sales to Iraq and the corresponding ASSF payments. The Tribunal also referred to the ITAT Kolkata's decision in DCIT vs. Rajrani Export Pvt. Ltd., upheld by the Kolkata High Court, which allowed similar commission payments under the "Oil for Food Program" as business expenditure. Consequently, the Tribunal allowed the assessee's claim for the ASSF payments.

3. Adjustment of Profits for the Purpose of Section 80HHC:
The CIT(A) directed the AO to consider only the profit element for computing the adjusted profits under Section 80HHC. The revenue challenged this, but the Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's judgment in M/s Topman Export vs. CIT, which clarified that only the difference between the sale value and the face value of DEPB represents profit on transfer of DEPB. Therefore, the Tribunal dismissed the revenue's appeal on this issue.

Conclusion:
- The Tribunal upheld the reopening of assessments under Sections 147/148 for both AY 2002-03 and 2003-04.
- The Tribunal allowed the assessee's claim for commission payments, including ASSF, related to sales to Iraq.
- The Tribunal upheld the CIT(A)'s direction to consider only the profit element for computing adjusted profits under Section 80HHC, dismissing the revenue's appeal on this issue.

Order Pronounced in the Court on 18/01/2016.