Tribunal rules in favor of assessee on commissions disallowance under "Food for Oil Programme" for A.Y. 2000-01 to 2002-03

The Tribunal ruled in favor of the assessee, holding that the disallowance of commissions paid on exports to Iraq under the "Food for Oil Programme" for A.Y. 2000-01 to 2002-03 was not justified. The disallowance was based on the Volcker Committee report's findings on illicit surcharges, but the Tribunal found no evidence linking the commissions to such surcharges. The commissions were approved by the Reserve Bank of India and paid to a third party, not diverted to the Iraqi government. The decision was made in favor of the assessee, and the appeals were partly allowed for statistical purposes.

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Issues:
Appeals against orders passed by CIT(A)-31, Mumbai regarding disallowance of commission paid on exports to Iraq under "Food for Oil Programme" for A.Y. 2000-01 to 2002-03.

Analysis:
The assessee firm, engaged in exporting machines for pharmaceutical industry, challenged the disallowance of commissions paid on exports to Iraq under the UN program. The assessee claimed deductions under section 80HHC and provided necessary documents during assessment proceedings. The contract was with the Government of Iraq, approved by the United Nations Security Council. The assessee argued that commissions were paid through the Reserve Bank of India to various parties and services were rendered as per contract terms.

For the years under consideration, assessments were reopened, questioning the surcharges paid to Iraq based on the Volcker Committee report. The AO disallowed 10% of the commissions, citing the Volcker report's findings on illicit surcharges. The CIT(A) upheld this disallowance. The assessee contended that similar payments were allowed in a Tribunal decision and argued against the mechanical application of the CBDT communication to invoke Explanation to section 37(1).

The Tribunal noted that the United Nations' sanction was for payments to the Iraq Government, not intermediaries. The commissions were approved by the Reserve Bank of India and paid to a third party, not diverted to the Iraqi government. The Tribunal held that the disallowance was not justified, as there was no evidence that the third party diverted commissions to the Iraqi government. The AO's addition was deleted, and the grounds challenging the assessment's validity were not addressed. The appeals were partly allowed for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee, holding that the disallowance of commissions paid on exports to Iraq under the "Food for Oil Programme" was not in accordance with the law. The decision was based on the lack of evidence linking the commissions to illicit surcharges, as found in the Volcker Committee report.

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