Income Tax Appellate Tribunal - Mumbai
Cipla Limited, Mumbai vs Assessee on 18 November, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "C", MUMBAI
BEFORE SHRI R.S. SYAL, A.M. AND SHRI V. DURGA RAO, J.M.
ITA Nos. 1272, 1273, & 1274/M/2009
Assessment Years: 2001-02, 2002-03 & 2003-04
M/s. Cipla Ltd., ... Appellant
Mumbai Central,
Mumbai - 400 008
(PAN - AAACC1450B)
Vs.
Dy. Commissioner of Income-tax, ...Respondent
Central Circle 2, CGO Building,
M.K. Marg, Mumbai - 400 020
Appellant by : Mr. D.P. Bapat & D.R. Jain
Respondent by : Mr. A.K. Sinha
.
O R D E R
PER V. DURGA RAO, J.M.:
These appeals filed by one assessee are directed against the orders of CIT(A)-Central - 1, Mumbai, for the assessment years 2001- 02, 2002-03, and 2003-04. Since common issue is involved in these appeals, they are being disposed off by this common order for the sake of convenience.
2. A common ground raised in these appeals are in respect of levy of penalty u/s 271(1)(c) of the Act.
3. Briefly stated, the facts of the case are that the assessments in this case for the relevant years had been originally completed under section 143(3). Subsequently the AO received information from Central Board of Direct Taxes vide letter F.No.414/1117/2005-IT(INV-
2 ITA NO. 1272 to 1274/M/10Cipla Ltd.
I) dated 18.11.2005 regarding illicit payment made by various suppliers as elaborately reported in the Volcker committee report. The report gave detailed account of manipulation of oil for food programme sponsored by United Nations (UN) on humanitarian consideration, by Saddham Hussain regime in Iraq. The kickback policy as per the report began in mid 1999 when Iraq started charging transportation fees which was not approved by the United Nations and such fees were paid directly to Iraqi controlled bank account or front companies outside the Iraq which did not come into Escrow accounts which had been maintained for oil transactions under the programme. The report pointed out that by mid 2000 Iraq had started a broaded policy to impose generally 10% kickback requirement on all humanitarian contracts. This was termed as "After Sale Service Fee (ASSF). The provision for ASSF was often incorporated into contract as the basis to inflate prices of oil and to permit contractors to recover from the United Nations Escrow Accounts, amounts they had paid secretly to Iraq in the form of kickback. The information received from CBDT based on Volcker committee report, the assessee has made ASSF payment of `.4,78,198 for the Asst. Year 2001-02, ` 11,57,478 for the Asst. Year 2002-03, ` 19,53,800 for the Asst. Year 2003-04.
4. The assessee also submitted that there was no evidence at all that the assessee was involved in making such payments to the then Iraq regime. It was pointed out that the assessee had an agency agreement dated 1.4.2001 with an agent based in UAE for promotion of exports in the Middle East territory including Iraq and the exports were effected through a genuine commercial agreement. The assessee had used the services of this agent even prior to entry into these formal agreement. The assessee accordingly urged that no addition could be made in the assessment for the relevant years.
5. The AO however did not accept the explanation of the assessee. It was observed by him that the Volcker committee was an independent committee appointed by UN which had given a categorical finding with the list of specific transactions and specific amount with 3 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
reference to which ASSF had been paid which were patently illegal. The assessee had also submitted that the OC No.1002237 in case of A.Y.2001-02 had not been executed by the assessee nor any commission had been debited but the same were rejected by the AO on the ground that the payment of US$ 3087 as ASSF was established by documents and therefore same was required to be considered for assessment even if the same pertained to some different transaction. The AO accordingly made additions of Rs.4,78,198/-; Rs.11,57,478/-; and Rs.19,53,800/- in the assessment for assessment years 2001-02 to 2003-04. On appeal, the CIT(A) confirmed the action of the Assessing Officer.
6. The assessee carried the matter before the ITAT and the ITAT confirmed the order of CIT(A) by holding that The claim of such expenditure which was to facilitate illegal payment can also be not allowed in view of the Explanation to section 37(1) as per which expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction.
7. To decide these appeals, we refer the facts from the Assessment Year 2001-02. The AO initiated penalty proceedings u/s 271(1)(c) for claiming expenses which were for making illegal payments. Therefore, a show cause notice u/s 274 r.w.s. 271(1)(c) was issued to the assessee. The explanations were submitted by the vide letter dt. 14/3/2008, wherein it was submitted as under:-
"1. First, our submission is that the disallowance of the alleged illegal payment is based on the Volcker Committee Report. In this report, it is clearly mentioned that the finding of kickbacks in the course of oil for food program does not necessarily implicate or indict the suppliers of goods of the Iraq Government.
2. In other words, there is no f inding whatever that we have made any illegal payments in the course of or in order to effectuate the sales to the Iraq Government.
3. Next, no deduction has been claimed by us whatsoever in respect of such alleged kickbacks. Our accounts do not ref lect any such payments. In other words, it is our submission that the disallowance made in the assessment is of such amounts which 4 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
were not claimed by us as deduction in the computation of business income.
4. We have further demonstrated that the only selling expenses incurred by us are by way of commission to the agent with whom we have dealt with in the course of business transactions even before the sales were effected under the oil-f or-food program. We have further established that we have made the commission payments to the agent for the services rendered to us. We have furnished documentary evidence in this behalf.
5. The learned CIT(A) has observed that the Volcker Committee has indicted our involvement in the kickback payments. This finding of the CIT(A) is clearly inconsistent with the f inding of the Volcker Committee itself.
8. The assessee further submitted that it should not be penalized u/s 271(1)(c) for the following reasons:-
"a) We have submitted our explanation in respect of the issue arising from Volcker Committee report.
b) Our explanation is based on the f inding of the Volcker Committee itself that the sellers of goods to the Iraq Government are not necessarily involved or indicted in the kickback payments.
c) There is no evidence of any expenditure incurred by us towards the alleged kickback payments.
d) There is also no evidence of any claim having been made by us for the alleged kickbacks.
e) The f inding of the CIT(A) is inconsistent with the f indings of Volcker Committee itself.
f) We have demonstrated and substantiated that the only selling expenses incurred by us are by way of commission to our agent for the commercial services rendered to us.
9. After considering the submissions of the assessee, the AO was of the view that there is no merit in the submissions as well as reasons of the assessee, therefore, the AO levied penalty u/s 271(1)(c) by observing as under:-
"The assessee company is merely in denial mode despite the specif ic transactions pointed out by the Volcker Committee. The assessee has not denied that these transactions, as identif ied vide OC Nos., were related to the goods supplied by them. The assessee is trying to take shelter under the commission paid by the agents which are stated to defray incidental expenses. However, a perusal of the contract agreement reveals that the contentions of the assessee company are f rivolous and without any basis. Besides even as per the contracts reveal that the principal i.e. the assessee company was to receive the payments 5 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
directly f rom the customers. Agent was specif ically forbidden to make collection or settlement directly. The agent was having its commission only. The agreement further states that all the contracts will be executed and entered into directly by the principal and agent shall have no authority to deal with the customers. Obvious these terms of reference in the contract agreements rule out the role of agents in making settlements or payments and any kickback on their account. Since the payments in the name of ASSF is an established fact as brought out by the Volcker Committee which is based on authentic documents of various ministries of Govt. of Irag, Banking institutions etc. Therefore, the payments in the name of ASSF have been received and it is the assessee company and not the agent has made the payments. Moreover, the principal is liable for the acts for its agents even if no specif ically mentioned in the contract, as it is a vicarious liability of the principal. Hence, the company cannot plead ignorance by denying or shif ting the illegal acts/payments to its agents.
Therefore, I am convinced that this is a fit case for levy of penalty u/s 271(1)(c) of the Act f or concealment of income by f urnishing of inaccurate particulars by claiming expenses by claiming the same as commission expenses, which it had known to be for illegal payments. The assessee company supplied goods to Irag under the UN Scheme, wherein the agents had no role to pay. The assessee company had contended that only selling expenses incurred by them were by way of commission. The assessee company has f ailed to explain that why would the agent pay ASSF from his own pocket, when he has no say in the deal or transaction. It is also clear that the agent had no say in the matter of these transactions, which were under the supervision of UN and the payments were made by the UN. Therefore, the explanation given by the assessee company is not bonaf ide much less to say about their denial, despite overwhelming evidence of illegal payments as kick backs, as brought out by Independent and impartial committee appointed by the United Nations.
Hence, I hold that the assessee has committed a def ault as envisaged under the provisions of section 271(1)(c) of the Act by claiming expenses to the extent of Rs. 478,198/-, which were on account of illegal kickback payments made as payment of ASSF, against the provisions of the Oil for Food Programme of the United Nation. Therefore, the tax on the amount sought to be evaded comes to Rs. 1,89,200/-, which is a minimum penalty levied."
10. Aggrieved by the order of AO, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) the assessee contended that the Volcker Committee has not indicted the assessee company, 6 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
hence, the finding of the AO are in consistent with the evidence and the records and as such no penalty is leviable on the assessee company. After considering the submissions of the assessee, the CIT(A) confirmed the penalty levied by the AO by holding that "I am of the considered view that the appellant has involved in making kickback payments in the form of ASSF which have been termed as illegal and against the United Nations policy and also against the international law and thereby the appellant has committed def ault of concealment of income in terms of section 271(1)(c) by f urnishing of inaccurate particulars and claiming expenses which were known as illegal payments." On being aggrieved, the assessee carried the matter before the Tribunal.
11. The A.R. of the assessee has contended before us that the Volcker Committee has not given any specific finding which indicts the assessee company. The learned AR submitted that there is neither any finding nor any evidence which is mentioned in the Committee's report that the assessee has made any illegal payments. As regards the allegations made by the AO that the assessee had failed to explain as to why agents make illegal payments on behalf of the assessee, the learned AR submitted that it did not admit at any time that the agent had made the illegal payments. The learned AR submitted that the findings of the AO are inconsistent with the evidence and the records, therefore, the penalty levied by the AO may be cancelled.
12. The learned counsel for the assessee further submitted that the payments to the Iraq Government which is not an offence in India. Therefore penalty cannot be levied.
The learned counsel for the assessee relied in the case of ACIT Vs. VIP Industries 122 TTJ (Mum)289 for the proposition that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty automatically confirmed. The decision relied upon by the learned counsel has no application to the facts of the case on hand.
7 ITA NO. 1272 to 1274/M/10Cipla Ltd.
He further relied upon the decision of Shivlal Tak Vs. CIT 251 ITR 373 (Raj). The above case relating to invoking of Expln. 1 to section 271(1)(c) of the Act. Therefore it is not applicable to the facts of the present case.
The learned counsel for the assessee relied on the decision in the case of CIT Vs. Reliance Petro Products 322 ITR 158 (SC) . This decision of the Hon'ble Supreme Court is not applicable to the facts of the case for the reason that the details submitted by the assessee are not correct.
The learned AR relied on the decision in the case of Dheeraj Lal Mangal Shah Vs. ITO (2010) 125 ITD 313 (Ahmd) (TM) for the proposition that penalty proceedings are different from assessment proceedings and the assessee is entitled to render fresh explanation. The facts of the present case is entirely different from the above case and therefore it is not applicable to the case on hand.
13. On the other hand, the learned DR, on the other hand, has relied upon the orders of the revenue authorities.
14. We have heard the learned representatives of the parties and perused the record. The admitted fact is that the Volcker Committee in its summary of report has clearly mentioned that it has segregated illicit payment made in connection with the oil and humanitarian contracts under the programmes. Oil surcharges were paid in connection with the contracts and humanitarian kickbacks were paid. The table clearly identify that how much was paid to the Govt. of Iraq with respect to particular programme contracts and the principle basis for this illicit payment data is the information received from various Ministries of Government of Iraq as well as data retrieved from numerous banking institutions and in some cases from the company contractors themselves. We find that the Committee in its report has clearly indicated the assessee company with regard to the transactions carried out by it in supply of goods to the Govt. of Iraq 8 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
and the kickbacks in the form of ASSF were paid which has been termed as illict payments. The assessee also not denied the supply of goods with respect of the transactions as mentioned in the Volcker Committee Report. The assessee is only denying to have made any kickback payments. But since there is a clear indiction by the Volcker Committee in its report about the involvement of the assessee company which is based on various govt. documents and taking into account the data from banking institutions. The ITAT in the quantum proceedings confirmed the disallowance made by the revenue authorities on the factual aspects as the there has been clear cut indiction of the assessee company by the Volcker Committee for making illicit payments which were further authenticated by various documents/informations received from Ministries of Govt. of Iraq and the information retrieved from various banking institutions there is no scope for going against such finding unless there is a evidence which controverts such finding. In this case, the assessee has paid ASSF payments to Iraq Government through his agent and the same is claimed in its return of income as commission payment and claimed as expenditure. Therefore, the assessee has not stated correct facts before the A.O. and claimed the commission amount as an expenditure and committed the concealment. It is pertinent to note that whether the payment directly made by the assessee or through his agent, is immaterial. The only issue for consideration to invoke section 271(1)(c) is whether the assessee has concealed the income or not ? It is a fact that the assessee has concealed the ASSF payment which is as stated herein above. It is also immaterial that whether the illegal payment made by the assessee to the Iraq Government amounting to offence or not to invoke section 271(1)(c). Therefore, we are of the considered view that the AO has rightly levied penalty u/s 271(1)(c) of the Act on the ground that the assessee committed default of concealment of income by furnishing of inaccurate particulars and claiming expenses which were known illegal payments. Therefore, we 9 ITA NO. 1272 to 1274/M/10 Cipla Ltd.
uphold the order of CIT(A) in confirming the penalty levied by the AO in the years under consideration.
15. Since the facts in Assessment Year 2002-03 & 2003-04 are materially identical to that of Assessment Year 2001-02, we respectfully follow the conclusions drawn therein and in the light of that we uphold the orders of the CIT(A) in Assessment Year 2002-03 and & 2003-04 also in confirming the penalties levied by the AO in those years.
16. In the result, the three appeals under consideration are dismissed as indicated above.
Pronounced in the open court on this 26 t h day of November, 2010.
Sd/- Sd/-
(R.S. SYAL) (V. DURGA RAO)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 26 t h November, 2010
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) concerned.
4) The CIT concerned.
5) The Departmental Representative, "C" Bench, I.T.A.T.,
Mumbai.
By Order
//true copy//
Asst. Registrar,
I.T.A.T., Mumbai.
*Gpr
10 ITA NO. 1272 to 1274/M/10
Cipla Ltd.
Description Date Intls
S.No.
1. Draft dictated on 16/11/10 Sr.P.S.
2. Draft placed before author 18/11/10 Sr.P.S.
3 Draft proposed & placed before JM/AM
the second Member
4 Draft discussed/approved by JM/AM
second Member
5 Approved Draft comes to the Sr.P.S.
Sr.P.S./PS
6. Kept for pronouncement on 26/11/10 Sr. P.S.
7. File sent to the Bench Clerk 26/11/10 Sr.P.S.
8 Date on which file goes to the
Head Clerk
9 Date of Dispatch of order