Monday, August 4, 2014

Payment of commission with RBI’s approval for export to Iraq under ‘Food and Oil programme’ isn’t prohibited

Where Assessing Officer disallowed assessee's claim for commission paid to intermediary companies in respect of export made to Iraq under 'Food for Oil Programme' run by United Nations, in view of fact that said payment was duly approved by RBI, impugned disallowance deserved to be deleted.


a)The assessee-firm made exports to Iraq under the 'Food for Oil Programme' run by the United Nations. It paid commission to various intermediaries in connection with export and such payments were made through agency of Reserve Bank of India.

b)The Assessing Officer (‘AO’) relied upon report of Volcker Committee wherein it was noticed that oil companies/traders paid premium to intermediaries above the United Nations' official rate, and such premium was used by the intermediaries to pay to the beneficiary or entity who was designated to receive the funds.

c)He further held that Iraq having initiated its policy of collecting illicit surcharge on every barrel of oil sold under the programme, under the caption "after sales services". Such payments had to be treated as prohibited in view of Explanation to section 37(1).

d)Merely by taking note of the Volcker Committee report the AO held that 10 per cent of the commission had to be disallowed, which was confirmed by the CIT(A). The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:-

1)It was rightly pointed out by the assessee that the United Nation’s sanction was with reference to payment made to Iraqi Government by suppliers and not the payment made to intermediaries.

2)The commission paid by the assessee to third party was duly approved by the Reserve Bank of India.

3)The Volcker Commission report had discussed about the utilisation of money by the recipient of the commission, whereas in the instant case there was no finding at all by the tax authorities that the third party had rendered any services and the commission paid to it was diverted to the Government of Iraq.

4)Thus, the disallowance made by the AO was not in accordance with law and the commission paid to third parties was not prohibited in terms of Explanation to Section 37(1). - AIR PAC EXPORTS V. ASSISTANT CIT [2014] 47 58 (Mumbai - Trib.)

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