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TMI Blog2012 (6) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... form of commission paid to the Iraqi party, in relation to the assessment year 2003-04. 2. Briefly stated, the material facts are like this. The assessee is, inter alia, engaged in the business of manufacturing, processing and exports of rice and tea. During the relevant financial period, the assessee had exported tea to Iraq under the 'Oil for Food Program', as sanctioned by the United Nations through its resolution no. 661 of 1990 and as administered by the UN. In broad terms, under the OFP, Iraq was allowed to sell a limited specified quantity of oil, and sale proceeds of the oil were to be deposited in an escrow account, out of which a major portion of the sale proceeds could be used by Iraq for meeting its purchases of goods on humanitarian grounds. The assessee was subjected to scrutiny assessment, and, subsequent to the finalization of scrutiny assessment, its assessment was reopened. As assessee's grievance against the initiation of reassessment proceedings has been rejected by the CIT(A) and the assessee is not in cross appeal or cross objection against the said CIT(A)'s order, we need not really deal with the facts leading to reassessment proceedings. Suffice to say tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct between the Iraq Government and the UN, wherein it appears that neither the appellant company nor the Government of India is involved. In view of the above and respectfully following the decision of the Hon'ble Kolkata Tribunal in the case of TIL Ltd Vs ACIT (supra), I hold that the entire disallowance on this account is allowable and, therefore, the order of the AO is reversed to that extent". 3. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 5. To properly appreciate the controversy requiring our adjudication in this appeal, it is necessary to take note of some background facts relating to the issue in appeal. There is no dispute that the assessee had made exports to Iraq under the 'Oil for Food Program', which was meant to mitigate the hardships to ordinary Iraqi citizens as a result of harsh trade sanctions against Iraq, as a result of its invasion of Kuwait. The assessee himself has stated, in the statement of facts, that the exports were made under the O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the proceeds of Iraqi oil exports, authorised by the Security Council. 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 Iraq's 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 Iraq. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducation, transport and telecommunications, water and sanitation, housing, settlement rehabilitation (internally displaced persons - IDPs), mine action, special allocation for especially vulnerable groups, and oil industry spare parts and equipment. The Government of Iraq introduced the following 10 new sectors in June 2002: construction, industry, labour and social affairs, Board of Youth and Sports, information, 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 United 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 staff 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 presented by the prospect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e FFOP worked like this. The Iraqi Government was allowed to export oil but the sale proceeds 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 necessities 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, 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 were 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trading Co., finds a prominent mention in the final report issued 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: ".............. 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 Trade: 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 coast of Jordan and to use them for commercial shipping. At the time of Alia's registration, Jordanian law requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that it sent to Alia. On other occasions, Alia sent invoices to suppliers indicating the amounts levied by ISCWT. Representatives of ISCWT came to Alia's office every month to inspect the company's records, and ISCWT also sent an employee to work at Alia. Suppliers paid their fees in various foreign currencies (not Iraqi dinars) to Alia's 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. Below is one such example of a letter from Alia to ISCWT, advising ISCWT of its receipt of payment on ISCWT's 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 Company 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 2329.1897 m3 of wood ; LC No. V734538, bill of lading no PK/Iraq/001, based on the following: $ 60,225.31 for internal transportation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the well settled principles of natural justice, equity and fair play' but this plea is too naïve to be accepted. The Volker Committee is freely available on the internet, is fully in public domain and anyone can access it. 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-deductible in computation of business income, unless these payments are hit by some other disabling provisions of the Income Tax Act. What is to be examined first is whether the amounts so paid are deductible business expenditure in the first place, and if so, whether these amounts are hit by any disabling provisions under the Act. Let us, therefore, take a quick look at the scheme of the Act from this perspective to deal with this aspect of the matter. Section 37(1) of the Act provides that "any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing/ stuffing to all Iraqi Governorates /Provinces/Warehouse, as specified in the respective orders, by trucks; g) arrange early inspection and internal approval of each consignment by the concerned ministry authorities, including the prescribed UN agencies; h) follow up with the UN security council office at Iraq for expediting the arrival report to be sent to the UNO office at New York, for releasing the payments; and i) to do such acts and things as required for execution of the order procured and realization of export proceeds. Thanking you, Sd/xx f. Rajrani Exports Limited 10. Alia has confirmed the above understanding and, vide letter dated 25th July 2001, stated that, "We hereby confirm that we will do all such activity on your behalf, from procurement of order to final realization of export proceeds to you on a fees to be charged against each export bill as raised by you" and that "the fees will be mutually decided and shall not be more than 10% of the order value". It is also important to bear in mind the fact that Alia was a Jordanian company and, therefore, the transactions between the assessee and Alia were not hit by any UN sanctions either. Revenue has not poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors... (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 Committee 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 can not be lead to the Assessing Officer's 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: Iraq's 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 Nations 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 Committee's recent Programme Management Report, available evidence indicates that Iraq deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orldwide paid kickbacks to Iraq in the form of inland transportation fees, after-sales-service fees, or both. 11. As a matter of fact, this Volker Committee report goes on to acknowledge the fact that while many companies freely went along with Iraq's demand for kickbacks, many companies ignored the probable use of these payments, there were also the companies 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 fee 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 our humble understanding, so far as category (a) is concerned, Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsportation 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"). (Page 304 of the report) Vessels berthing at Umm Qasr required the approval 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 exclusive authority for all activity at Iraqi ports. Its official 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 coordinated 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37(1) is concerned. 18. A lot of emphasis has been placed by the CIT(A) on this Tribunal's decision in the case of TIL Ltd (supra). However, as we have decided the matter on merits and on the first principles, we see no need to deal with the said judicial precedent. Our reasoning could be different than the reasoning adopted by the CIT(A) and that adopted by the coordinate bench in TIL's case (supra), but then our conclusion is the same as arrived by the CIT(A) and by the coordinate bench. It is this aspect of the matter which is material for the present purposes. 19. In view of the above discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 20. As we part with the matter, we must make it clear that our references to the Volker Committee report were only with a view to analyse as to whether even if everything stated in the Volker Committee report is taken as correct and this report is taken as an admissible evidence, will the deductibility of expenses in the hands of the assessee will be hit by Explanation to Section 37(1). However, to what extent this report can be relied upon in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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