TIOL-DDT 1521 · the untouched capture
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1521</font><br>
04.01.2011<br>
Tuesday</strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"> ITAT Fires The BOFORS Gun</font></strong>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> quality of the Bofors guns were never in doubt, but the butts of the guns have been hitting the Congress party with routine regularity. The latest salvo came from the Income Tax Appellate Tribunal. In an elaborate order delivered on the last day of 2010, running into nearly 30,000 words, the ITAT emphatically held that WN Chadha received the Bofors Commission and that it was taxable. When Bofors fires, there is no space for anything else. Today’s <strong>DDT</strong> is entirely on Bofors and the ITAT Order.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Let us have a recap on the Bofors issue as the ITAT saw it.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In 1987, a scam in purchase of equipments, known as the Bofors Scam was unearthed, indicating that in respect of the gun deal between M/s. Bofors, a Swedish company dealing in arms and ammunition and the Government of India, illegal commission / kickbacks were paid by Bofors violating specific policies on which the deal was signed by the Govt. of India. This expose resulted in an uproar across the whole of India and led to the setting up of a Joint Parliamentary Committee (JPC) and investigations by CBI, FERA etc., including the Income Tax department.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Indian Defence purchase policy, till 1984, allowed foreign bidders to have their Indian agents. However, they were required to furnish details of their Indian agents, if any, to the Government in a prescribed proforma. Subsequently, the Govt. of India, made a uniform policy, prescribing that “agents were not to be allowed in Indian purchases. If any bidder had maintained one, the amount so payable to agent by the supplier, was to be reduced from the quoted deal”. The revised policy was to ensure that the deal was on a principal to principal basis, to avoid undesirable consequences which may arise out of such arrangement to save the cost to the budget and thus to the public exchequer.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Bofors of Sweden, in its declaration dated May 19, 1984, had informed that - W.N. Chadha of M/s. Anatronic General Corporation, C-4, Main Market, Vasant Vihar, New Delhi 110057, was their agent, and that, apart from W.N. Chadha, Hersh W. Chadha, Marketing Director of M/s. Anatronic General Corporation, Brig. B.B. Bhatnagar (retired) and Brig. A.L. Verma (retired) were designated: (a) to liaise with the Government of India for the contract; (b) to liaise with the Indian Authorities.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Consequent to the changed purchase policy, the Department, asked M/s. Bofors on May 3, 1985, to dispense with the services of its declared agent and comply with such Indian policy requirements. Bofors did not respond immediately and as late as on March 10, 1986 informed that, Bofors “do not have any Representative/Agent especially employed in India for this project”. However, for administrative services, such as hotel bookings, transportation, forwarding of letters, telexes, etc., they were using a local firm, Anatronic General Corporation.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">On March 24, 1986, a contract was entered into between the Govt. of India and M/s. Bofors, after approval by the then Prime Minister, who was also the Defence Minister, for supplying four hundred FH 77-B gun systems along with vehicles, ammunition and other accessories, at a total cost of SEK 8,410,660,984 [equivalent approximately to Rs.1437.72 crores - without reducing any agent representation]. An advance of 20% was paid to Bofors on May 2 1986.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">On 16-4-1987, a Swedish radio came out with a sensational announcement that Bofors had violated the Swedish Law by managing to obtain this Gun Supply contract from the Govt. of India, amongst other things, due to the fact that local agents had been paid large amounts in “bribes”. The Radio added that the agents had helped Bofors in getting the contract by dubious means with the help of local contacts and support within the Indian Military Authorities, the Bureaucracy and politicians. The illicit payments to the agents and others were said to have been made by transactions in secret bank accounts in Switzerland.</font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">ALL HELL BROKE LOOSE</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Investigations revealed that one Mr. Quattrochhi had contacted Myles Tweedale Scott, Director of M/s. AE Services Limited, sometime before 7-8-1985, and was instrumental in bringing about the agreement between M/s. AE Services Limited and M/s. Bofors. Mr. Quattrocchi remained in India from 28-2-1965 to 29-7-1993, except for a brief interval from 4-3-1966 to 12-6-1968. He was a Certified Chartered Accountant by profession, working with M/s. Snamprogetti, an Italian multinational company (MNC) providing the services of designing, engineering, management of construction and the training of personnel in the sector of oil refineries, gas processing, petrochemicals, fertilizers and pipelines. Neither Snamprogetti, nor Mr. Quattrocchi had any experience of guns, gun-systems or any related equipments.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It emerged that after payment of Rs.29615.00 lakhs, equivalent to 20% of the contract value, to Bofors on May 2, 1986 by the Govt. of India, Bofors remitted a sum of SEK 50,463,966.00 (equivalent to USD 7,343,941.98), on September 03, 1986, to A/c No. 18051-53 of M/s. A.E. Services Limited at Nordfinanz Bank, Zurich. This Account of M/s. A.E. Services Limited C/o Mayo Associates SA, Geneva, had been opened only a fortnight earlier, on August 20, 1986, by Myles Tweedale Stott as its Director. This amount of SEK. 50,463,966.00 works out to be exactly 3% of the amount of advance paid by the Govt. of India to Bofors and was, thus, perfectly in accordance with the terms set out in the A.E. Services Ltd. – Bofors Agreement dated November 15, 1985.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Investigations revealed that Mr. W.N. Chadha and Mr. Quattrocchi had been transferring the funds received from Bofors frequently from one account to another and from one jurisdiction to another to avoid detection and to obliterate the trial of the money.</font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Bofors and Income Tax - Bofors Commission was received and is taxable!</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> evidence collected during investigation by the income Tax Authorities and other agencies reflected that the assessee, Mr. W. N. Chadha had received income in this Bofors gun deal more than what was disclosed in his returns of income. The Assessing Officer (AO), during the course of assessment proceedings, collected a lot of evidence, recorded the assessee’s statement and made additions along with other additions under the head House Property Income and made disallowance of business expenditure and other disallowances. The assessments were appealed against by the assessee. The CIT(A) confirmed the orders of the AO. Aggrieved, the present assessee has filed second appeals with the ITAT. It is pertinent to mention that the then assessee expired after the framing of the assessments and is represented by his son/legal heir Shri Hersh Chadha.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Material On Record and Evidence:</strong> The ITAT differentiated between the evidence and material available on record in the Evidence Act and in income tax proceedings. The Income Tax Act uses the words ‘material available on record and was prepared to accept the Swedish Audit Bureau’s report, JPC’s report, CBI’s charge sheet and photocopies of Hindu Newspaper as material on record reckoning preponderance of probabilities, human conduct and surrounding circumstances.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The ITAT confirmed the addition of commission to the assessee’s income by observing,<em> “Keeping in consideration the rival contentions, all the facts, the material available on record, the probable normal human conduct, the surrounding circumstances, the preponderance of probabilities and the legal propositions, we have not hesitation to hold that assessee received the impugned commission as added by AO as his income for AYs 1987-88 and 1988-89”.</em></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">BOFORS - The HINDU Newspaper as evidence/material on record</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> assessee contended that the Agency of “The Hindu” newspaper neither authenticated the source of their information nor the originals thereof were ever produced and that the assessee was never given opportunity to cross examine them, and that consequently, it is not proved that Svenska is the assessee’s front company or there is any power of attorney and existence of Swiss Bank Account No. 99921-TU. In the absence of such material, as per the assessee, the additions cannot be sustained.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The ITAT found that information demonstrated beyond question that the assessee was the recipient of this commission. “The Hindu” newspaper is a further corroboration of the facts which show that the assessee is the recipient.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The ITAT held, “Besides, from the grounds of appeal, it comes out that no specific ground for insistence on the personal attendance of “The Hindu” newspaper officials was specifically requested by the assessee. There is no letter in the assessee’s paper book evincing that any specific request was made by the assessee for “The Hindu” news agency’s personal attendance and cross examination. The plea in this behalf, without taking any specific ground in the first and second appeals and without there being any request available on the paper book, cannot be accepted at this belated stage. AO is obliged to confront the assessee only the material gathered by him, which is disputed. This specious plea is a mere afterthought aimed at trying to thwart the assessment of correct income and is liable to be rejected as such”.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The HINDU had later carried a cartoon, “<strong>VOTE FOR QONGRESS</strong>”</font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Bofors - India is a soft state and one can meddle with its tax laws with impunity?</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> ITAT passed strictures against the Income Tax Department for its inaction in bringing to book other evaders.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Tribunal observed,</font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">We are surprised to observe that though the Department has proceeded against the assessee, no action seems to have been taken against either Services or Ottavio Quattrocci and other related entities, by the Income Tax Department. Bofors admittedly paid the amounts to the assessee, AE Services, Quotrocci and other entities. It’s liability for withholding tax is built in. Mr Ottavio Quatrocci was living in India for a considerable time. The issue about his tax residence status should have been verified.</font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">In our view the Department should have carefully examined the issues about their taxability and their having PE in India and appropriate proceedings should have been undertaken to assess and recover taxes. We may point out there exists a serious issue apropos Bofors for not having deducted withholding tax i.e. TDS, from such payments to the assessee/ Svenska, AE Services, Quottrocci. In our view, to enforce the rule of law, these steps were desirable to bring all the relevant income tax violations to a logical end by the Income Tax Department. Inaction in this regard may lead to a non-existent undesirable and detrimental notion that India is a soft state and one can meddle with its tax laws with impunity.</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">You
can get an exhaustive analysis of the ITAT order in <font color="#0066CC"><strong>TII</strong></font> <strong>(<a href="http://www.taxindiainternational.com/" target="_blank">www.taxindiainternational.com</a>) </strong></font></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Jurispruden</font><font color="#FF6633" size="5">tiol</font><font color="#006600"> – Wednesday's cases </font></strong></font></strong></font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left">Central Excise</strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"> <strong>Order Set aside by Commissioner (Appeals) for violation of principles of natural justice - upheld - CESTAT</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <strong>COMMISSIONER</strong> (Appeals) remanded the case to the Adjudicating Authority as principles of natural justice was violated but Revenue has challenged the order before the Tribunal which remanded it to the Commissioner (Appeals) to decide the case afresh. In the second round, the Commissioner (Appeals), set aside the order of the lower authority as principles of natural justice was violated. Revenue is again before Tribunal, but without success.</font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Income Tax</strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Whether where transaction of sale and purchase of shares is not reflected in share register of company whose shares were transferred and broker who was stated to be instrumental also denied transaction, onus to prove authenticity of transaction lies on assessee - YES, says High Court</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> issue before the High Court is - Whether where the transaction of purchase and sale of shares was not reflected in the share register of the company whose shares were transferred and the broker who was stated to be instrumental in the transaction, also denied the transaction, the onus to prove the authenticity of the transaction lies on the assessee. And the verdict goes against the assessee.</font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs</font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Due to compelling circumstances, importer failed to re-export containers imported duty free – however, since they have paid duty as per notification, appellants have not violated any condition of notification - CESTAT</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>AT</strong> compelling circumstances, the respondents have not been able to re-export the said container hence they have opted to pay duty as per the above said notification which has been paid by them. Hence the appellants have not violated any condition of the notification. In these circumstances, the redemption fine and penalty is also not imposable.</font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">See our columns Tomorrow for the Judgements</font></strong></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until Tomorrow with more <strong>DDT</strong></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice Day.</font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <a href="mailto:vijaywrite@taxindiaonline.com"><strong>vijaywrite@taxindiaonline.com</strong></a></font></p>
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