Wa/581/2020 Of Deputy Commissioner Of Income Tax v. M/S. Hitachi Power Europe Gmbh

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 04.09.2020 CORAM : THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HON'BLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Judgment Reserved On Judgment Pronounced On 24.08.202004.09.2020Writ Appeal No.581 of 2020 andC.M.P.No.8178 of 20201. Deputy Commissioner of Income tax, International Taxation – 1, Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034.2. Deputy Commissioner of Income tax, International Taxation, Circle – 2, Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034.3. Deputy Commissioner of Income tax, International Taxation – 1(2), Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034.4. Deputy Commissioner of Income Tax, Transfer Pricing Officer-2, 5[th] Floor, BSNL Building Tower-1, Greams Road, Chennai-34. .. Appellants/Respondents 3 to 6-vs-1. M/s.Hitachi Power Europe GmbH, A Company Incorporated under the Laws of Germany and Rep., by the Authorized Signatory of its Project Office, Chennai, Mr.Pravesh P. Jain, Amara MLS Business Centre, 6[th] Floor, No.148, Room No.601 A & B, 616 & 618, Acropolis, Dr.Radhakrishnan Salai, Mylapore, Chennai-600 004... Respondent/Petitioner 2. Income tax Settlement Commission, Additional Bench, Chennai, Ministry of Finance, Department of Revenue, 640, Anna Salai, Nandanam, Chennai-600 035. 3. Dispute Resolution Panel-2, Office of the Dispute Resolution Panel, 7[th] Floor, Income tax Office, BMTC Building, 80 Feet Road, Koramangala, Bengaluru-560 095. .. Respondents/Respondents 1 & 2 Writ Appeal under Clause 15 of the Letters Patent to setaside the order dated 17.02.2020 made in W.P.No.3706 of 2019,which was filed for the issuance of Writ of CertiorarifiedMandamus to call for the records of the 1[st] respondent containedin the impugned order under Section 245D(2C) of the Income TaxAct, 1961 bearing TN/CN – INTL.TAX/ 2018-19/ 23/ IT dated09.01.2019 and to quash the same as arbitrary, unjust andillegal and to consequently direct the 1[st] respondent to pass afresh order under Section 245D(2C) of the Income Tax Act, 1961admitting the application filed by the petitioner in accordancewith law.For Appellants:Ms.Hema Muralikrishnan,Senior Standing Counsel:assisted byMr.Prabhu Mukunth ArunkumarFor 1[st] Respondent:Mr.P.S.Raman,Senior Counsel:assisted by Mr.R.Sivaraman*******JUDGMENT T.S.Sivagnanam, J. This appeal by the Revenue is directed against the order inW.P.No.3706 of 2019 dated 17.02.2020, filed by the 1[st]respondent-Company seeking to quash the order passed by the the2[nd] respondent, Income Tax Settlement Commission (for brevity“the Settlement Commission”), dated 09.01.2019 and to direct theSettlement Commission to pass a fresh order under Section 245D(2C) of the Income Tax Act, 1961 (hereinafter referred to as“the Act”), by admitting the application filed by the 1[st]respondent/writ petitioner. The writ petition was allowed by https://hcservices.ecourts.gov.in/hcservices/ the impugned order and aggrieved by the same, the Revenue is onappeal before us. 2.We have elaborately heard Ms.Hema Muralikrishnan, learnedSenior Standing Counsel, assisted by Mr.Prabhu MukunthArunkumar, learned counsel for the appellant-Revenue; andMr.P.S.Raman,learnedSeniorCounsel,assistedbyMr.R.Sivaraman, learned counsel appearing for the 1[st]respondent/writ petitioner. https://hcservices.ecourts.gov.in/hcservices/ the impugned order and aggrieved by the same, the Revenue is onappeal before us. 2.We have elaborately heard Ms.Hema Muralikrishnan, learnedSenior Standing Counsel, assisted by Mr.Prabhu MukunthArunkumar, learned counsel for the appellant-Revenue; andMr.P.S.Raman,learnedSeniorCounsel,assistedbyMr.R.Sivaraman, learned counsel appearing for the 1[st]respondent/writ petitioner. 3.The 1[st]respondent/writ petitioner is a Companyincorporated under the Laws of Germany engaged in the design andconstruction of fossil – fired power plant as also supplying keycomponents such as utility steam generators, environmentalengineering equipments, turbines etc. During June, 2010, theNational Thermal Power Corporation Limited (NTPC) invited bidsunder International Competitive Bidding from eligible biddersfor supply and installation of 11*660MW steam generators at fiveplaces in India. The 1[st] respondent/writ petitioner is stated tohave worked as sub-contractor to BGR Energy Systems Limited(BGRE), who have been selected by NTPC as a contractor forexecution of the projects. The other finer details pertainingto the scope of the project may not be very relevant for thepurpose of arriving at a decision in this appeal. 4.The project office of the petitioner was subjected tosurvey by the 1[st] appellant during October, 2017 pursuant towhich, the 1[st] respondent/writ petitioner received a show causenotice calling for details pertaining to offshore supplies madeby them and they were given three days time to respond by29.12.2017. According to the 1[st] respondent/writ petitioner,since their German Head Office was closed from 23[rd] December,2017 till 1[st] January, 2018 for Christmas, the 1[st] respondent/writpetitioner submitted details to the extend available with themon 29.12.2017. The 2[nd] appellant passed a draft assessment orderdated 31.12.2017 under Section 144C of the Act. The 1[st]respondent/writ petitioner filed a writ petition in W.P.No.1248of 2018 challenging the same, inter alia contending that therehas been gross violation of principles of natural justice. Thewrit petition was entertained and an order of interim stay wasgranted on 22.01.2018. However, the 1[st]respondent/writpetitioner took a decision to withdraw the writ petition andsubmitted their objections to the draft assessment order beforethe Dispute Resolution Panel (DRP). Further, the 1[st]respondent/writ petitioner is stated to have taken a decision toapproach the Settlement Commission, since they wanted to avoidprotracted litigation. Accordingly, an application underSection 244C of the Act was submitted to the SettlementCommission on 16.11.2018. The Settlement Commission by orderdated 26.11.2018, passed under Section 245D(1) of the Act, allowed the application to be proceeded with. Consequently, theCommissioner of Income Tax (International Taxation), Chennai,(CIT) filed his report dated 27.12.2018 under Section 245D(2B)of the Act. The Settlement Commission fixed the date of hearingas 08.01.2019 for considering the application in terms ofSection 245D(2C) of the Act and in the said hearing, theAuthorized Representative of the 1[st] respondent/writ petitionerappeared and reiterated the stand taken in the settlementapplication that they had fully and truly disclosed all factsand that the manner in which income was earned by the 1[st]respondent relating to the assessment years 2015-16 to 2018-19.The Settlement Commission by order dated 09.01.2019, held thatthe application was not maintainable, not allowed to beproceeded with and is treated as 'invalid' under Section 245D(2C) of the Act. Challenging the said order dated 09.01.2019,the 1[st] respondent/writ petitioner filed the writ petition, whichhas been allowed by the impugned order. 5.Ms.Hema Muralikrishnan, learned Senior Standing Counselappearing for the appellant-Revenue strenuously contended thatthe learned Writ Court ought to have noticed the distinctionbetween Section 245D as it stood prior to 2007 and as it standsas on date. In terms of the unamended provision, the SettlementCommission was required to issue notice to the Commissionerregarding the application made by an assessee and thereafter,within one year, pass an order either to reject or allow theapplication. If the application was admitted, the relevantfacts will be called for and if necessary, investigation will beordered and final orders will be passed under Section 245D(4) ofthe Act. However, under the amended Section 245D, the decisionof the Settlement Commission to allow the application to beproceeded with or rejected under Section 245D(1) is an orderthat is passed after hearing the applicant alone. On beingsatisfied that the application can be allowed to be proceededwith, notice is sent to the Commissioner for his report and theSettlement Commission can consider the validity of theapplication under Section 245C of the Act and precisely that wasdone by the Settlement Commission after affording opportunity tothe 1[st] respondent/writ petitioner. Therefore, the learned WritCourt ought not to have interfered with the order passed by theSettlement Commission. 6.It is submitted that the learned Single Bench had reliedon the decision of the Hon'ble Supreme Court in the case of CITvs. Express Newspapers Limited [(1994) 206 ITR 443 (SC)], whichdecision was rendered in the context of Section 245D, as itstood then. However, after the amended provision in 2007,providing for three stages to the applicant to prove thevalidity of their application, the said decision cannot beapplied to the facts and circumstances of the 1[st] respondent/writ petitioner's application. 7..The learned Senior Counsel placed reliance on thedecision of the High Court of Delhi in Omaxe Ltd., vs. ACIT[(2012) 25 taxmann.com 190] and submitted that the decisiontaken by the Settlement Commission is in consonance with the lawlaid down in the said decision. Further, it is submitted thatthe learned Single Bench ought to have followed the decisionrelied on by the Revenue in the case of Abdul Rahim vs. ITSC[(2018) 96 taxmann.com 571] wherein, it is held that if theCommission is fully satisfied that there is suppression ofmaterials and there is no valid and true disclosure of income,even while hearing the matter at the stage of Section 245D(2C),is empowered to reject the application. 8.Reliance was placed on the decision in Mr.Hassan Ali Khanvs. Settlement Commission [(2008) 299 ITR 127 (Bombay)] wherein,it was held that the Commission must be satisfied from thereport of the CIT that the application is not invalid underSection 245D(2C). The learned counsel took us through the orderpassed by the Settlement Commission, the report filed by the CITand the other materials placed in the typed set of papers andsubmitted that the scope of interference with the order passedby the Commission is very limited and the learned Writ Courtought not to have interfered with the same. 9.Per contra, the learned Senior Counsel appearing for the1[st] respondent/writ petitioner submitted that the order impugnedin the writ petition passed by the Settlement Commission was notsustainable in law, as the 1[st] respondent in their applicationbefore the Commission had clearly disclosed as to what are theaspects, which need to be settled, which were in the followingterms:- “2. Particulars of issues to be settled:-2.1. Whether the Applicant is taxable inIndia on account of income earned from offshoresupply of goods? 9.Per contra, the learned Senior Counsel appearing for the1[st] respondent/writ petitioner submitted that the order impugnedin the writ petition passed by the Settlement Commission was notsustainable in law, as the 1[st] respondent in their applicationbefore the Commission had clearly disclosed as to what are theaspects, which need to be settled, which were in the followingterms:- “2. Particulars of issues to be settled:-2.1. Whether the Applicant is taxable inIndia on account of income earned from offshoresupply of goods? 2.2. Determination of the total income ofthe Applicant for each of the AYs, being AY2015-16 to 2018-19 as per the provisions of theAct.2.3. Determination of the total taxliability of the Applicant for each of the fourassessment years under consideration.2.4. Any other issue that may be consideredfit by the Hon'ble Settlement Commission in theinterest of justice or to make the settlementeffective.” 10.To take a decision on the above issues, an adjudicationprocess is required to be adopted and the application field bythe 1[st] respondent/writ petitioner could not have been thrown outat the stage of 245D(2C) of the Act. Further, by referring tothe factual details, it is submitted that there were no failureon the part of the 1[st] respondent/writ petitioner to disclosefully and truly any of the facts or particulars of the incomeand the application ought to have been allowed to be proceededunder Section 245D(2C). It is further submitted that in termsof sub-Section (4) of Section 245D, the Commission is entitledto adjudicate the matter and pass orders as it deems fit on thematters covered in the application. Thus, it is submitted thatthe learned Single Bench rightly considered the scheme ofSection 245D and allowed the writ petition. 11.On the merits of the matter, the learned Senior Counselsubmitted that the Settlement Commission without appreciatingthe scope of the contracts, arrived at the conclusion that thecontracts are composite in nature. To demonstrate that thisfinding is incorrect, the learned counsel had referred toAnnexure-D, Item-4 of the application and submitted that thereis no artificial splitting up of a contract and the bids invitedand the contracts awarded were independent contracts. 12.After elaborately hearing the learned counsels for theparties, we are of the considered view that the learned SingleBench was right in interfering with the order passed by theCommission and allowing the writ petition. We support suchconclusion with the following reasons. 13.The application filed by the 1[st]respondent/writpetitioner was allowed to be proceeded with by the SettlementCommission under Section 245D(1) of the Act. In terms ofSection 245D(2), the copy of such order passed under sub-Section(1) of Section 245D will be sent to the applicant and to the CITand in terms of sub-Section (2B) of Section 245D, the SettlementCommission shall call for a report from the CIT, who shallfurnish the report within a period of thirty days' of thereceipt of the communication from the Settlement Commission. Onreceipt of the report, the Commission will proceed to take adecision under sub-Section (2C) of Section 245D of the Actwithin a period of fifteen days' from the date of receipt of thereport by an order in writing declaring the application inquestion as invalid and before doing so, afford opportunity ofbeing heard to the applicant. The application filed by the 1[st]respondent/writ petitioner was declared to be invalid on theground that there is no true and full disclosure of the incomeof the assessee. 14.The argument of the Revenue is that full opportunity has 14.The argument of the Revenue is that full opportunity has been given to the 1[st] respondent/writ petitioner to make theirsubmissions before the Commission before an order was passedunder sub-Section (2C) of Section 245D and therefore, thelearned Writ Court ought not to have interfered with the orderand the order attempts to re-write Section 245D of the Act. 15.We do not agree with the said submission, as it isimportant to take note of the legislative intent and scope ofpower vested with the Settlement Commission under sub-Section(2C) and sub-Section (4) of Section 245D. For betterappreciation, these two sub-Sections are quoted hereinbelow:-“Section 245D(2C):- Where a report of the [PrincipalCommissioner or] Commissioner called for undersub-section (2B) has been furnished within theperiod specified therein, the SettlementCommission may, on the basis of the report andwithin a period of fifteen days of the receiptof the report, by an order in writing, declarethe application in question as invalid, andshall send the copy of such order to theapplicant and the [Principal Commissioner or]Commissioner: Provided that an application shall not bedeclared invalid unless an opportunity has beengiven to the applicant of being heard: Provided further that where the [PrincipalCommissioner] Commissioner has not furnished thereport within the aforesaid period, theSettlement Commission shall proceed further inthe matter without the report of the [PrincipalCommissioner or ]Commissioner. Section 245D(4):- (4) After examination of the records and thereport of the [Principal Commissioner or]Commissioner, if any, received under— (i) sub-section (2B) or sub-section (3), or(ii) the provisions of sub-section (1) asthey stood immediately before their amendment bythe Finance Act, 2007, and after giving an opportunity to the applicantand to the [Principal Commissioner or]Commissioner to be heard, either in person orthrough a representative duly authorised in thisbehalf, and after examining such furtherevidence as may be placed before it or obtainedby it, the Settlement Commission may, in accordance with the provisions of this Act, passsuch order as it thinks fit on the matterscovered by the application and any other matterrelating to the case not covered by theapplication, but referred to in the report ofthe [Principal Commissioner or] Commissioner. 16.The power to be exercised by the Commission under sub-Section (2C) of Section 245D is within a period of fifteen days'from the date of receipt of the report of the CIT. Thisprovision gives power to the Settlement Commission to declare anapplication as invalid after affording an opportunity of hearingto the applicant. Under sub-Section (4) of Section 245D, theCommission after examination of the records and report of theCIT under sub-Section (2B) or sub-Section (3) of Section 245Dand after affording an opportunity to the applicant and to theCIT to be heard either in person or through AuthorizedRepresentative and after examining such further evidence as maybe placed before it, or obtained by it, the SettlementCommission may, in accordance with the provisions of the Act,pass such order as it deems fit on the matters covered by theapplication or any other matter relating to the case not coveredby the application, but referred to in the report of the CIT.Thus, the procedure to be adopted by the Settlement Commissionwhile exercising powers under sub-Section (2C) of Section 245Dis summary in nature. No doubt, the applicant is given anopportunity of being heard. 17.The plain reading of sub-Section (2C) of Section 245D ofthe Act does not spell out an adjudicatory process. Therefore,if in the opinion of the Commission, based upon the report theissue needs to adjudicated, the application cannot be declaredas invalid. Therefore, each case, which comes before theCommission has to be decided on its own facts. 18.In several cases, where search and seizure operations areconducted, where contraband is involved, where there isfraudulent practice adopted, the assessees approach theCommission. Even in those cases, if the Commission allows anapplication to be proceeded with under Section 245D(1), yet uponreceipt of the report, the application can be declared invalidunder sub-Section (2C) of Section 245D. In fact, the decisionin Abdul Rahim (supra) is one such case. 19.We have referred to the four issues, which the applicantwanted to be settled by the Commission, which have been statedabove and, the first among the four issues is with regard to theincome earned from offshore supply of goods. The Commission waslargely guided by the report of the CIT, who reported that thecomposite contract of offshore and onshore services are https://hcservices.ecourts.gov.in/hcservices/ artificial bifurcated. The Settlement Commission held that thecontention of the 1[st] respondent/writ petitioner that it is not acomposite and it was a separate composite and the same was doneby NTPC was held to be not fully true. In other words, theSettlement Commission appears to have accepted the fact that thecontracts were bifurcated by NTPC, the entity which invited thetender, but the Commission would state that the bifurcation doneby NTPC was only for financial reasons. The question is whethersuch a finding could lead to an application being declared asinvalid under Section 245D(2C) on the ground that the 1[st]respondent/writ petitioner has failed to make full and truedisclosure of income. In our considered view, the answer to thequestion should be a definite no, as this issue could not havebeen decided without an adjudication. 20.To decide whether a contract is a composite contract orseparate contracts, a deeper probe in to the factual scenario aswell as the legal position is required. If such is the factsituation in the case on hand, the application of the 1[st]respondent/writ petitioner could not have been declared asinvalid on account of failure to fully and truly disclose itsincome. Thus, what was required to be done in the instant casewas to allow the application to be proceeded with under Section245D(2C) and take up the matter for consideration under Section245D(4) and take a decision after adjudicating the claim. 20.To decide whether a contract is a composite contract orseparate contracts, a deeper probe in to the factual scenario aswell as the legal position is required. If such is the factsituation in the case on hand, the application of the 1[st]respondent/writ petitioner could not have been declared asinvalid on account of failure to fully and truly disclose itsincome. Thus, what was required to be done in the instant casewas to allow the application to be proceeded with under Section245D(2C) and take up the matter for consideration under Section245D(4) and take a decision after adjudicating the claim. 21.The argument of the appellant-Revenue that the learnedWrit Court has re-written the statutory provision is anincorrect submission. The marked distinction with regard to theexercise of power of the Settlement Commission at the (2C) stateand (4) stage is amply clear from the wordings in the statute.The Commission can declare an application to be invalid at the(2C) stage. Such invalidation cannot be by a long drawnreasoning akin to a decision to be taken at the stage of Section245D(4). This is so because, sub-Section (4) of Section 245Dgives ample power to the Commission to examine the records, thereport of CIT received under sub-Section (2B) or sub-Section (3)or the provisions of sub-Section (1), as they stood immediatelybefore their amendments by Finance Act, 2007. The Commission isrequired to give an opportunity to the applicant, the CIT, theyare entitled to be represented by an Authorized Representativeand after hearing them and after examining such further evidenceas may be placed before it or obtained by it, the SettlementCommission, may, in accordance with the provisions of the Act,pass such order as it deems fit. Therefore, the scope ofenquiry is not confined to the statements made in theapplication, the response filed by the applicant to the reportof the CIT, but also the submissions made during the personalhearing and any further evidence as may be placed before it bythe applicant or obtained by the Settlement Commission in exercise of its power and then proceed to pass orders as itdeems fit. Therefore, the procedure at the (2C) stage isundoubtedly summary in nature and the application filed by the1[st] respondent/writ petitioner could not have been declared asinvalid at the said stage, as the issue requires adjudication,which can be done only when the application is decided underSection 245D(4) of the Act. 22.The decision relied on by the Revenue in the case ofMr.Hassan Ali Khan (supra) would, in fact, support theconclusion, which we have arrived at in the preceding paragraph.It has been held that the Settlement Commission can treat theapplication as invalid meaning thereby non est, if the applicantis not made a full and true disclosure and further must disclosehow the income has been derived. The expression “invalid” willhave to be given a meaning of “non est”, in other words, as ifnot made on and from the inception. If on the material, itarrives at a conclusion even prima facie that there was no trueand full disclosure, it has then a right to declare theapplication as 'invalid'. As rightly pointed out by the Hon'bleDivision Bench, there is a prima facie opinion formed by theCommission at the (2C) stage and this can never substitute anorder under sub-Section (4) of Section 245D. The issues, whichwere requested to be settled by the 1[st] respondent before theCommission qua, the report of the CIT cannot obviously be anissue for a prima facie decision at the (2C) stage. 23.For all the above reasons, we find that the appellant-Revenue has not made out any ground to interfere with the orderpassed by the learned Single Bench. 23.For all the above reasons, we find that the appellant-Revenue has not made out any ground to interfere with the orderpassed by the learned Single Bench. 24.Accordingly, the appeal filed by the appellant-Revenue isdismissed. The learned Single Bench fixed an outer time limitof twelve weeks for the Commission to pass orders. After thewrit petition was allowed, the CIT had filed a report in termsof Rule 9 of the Income Tax Rules on 11.03.2020. Thereafter, onaccount of the Nationwide lockdown and the lockdown announced bythe State of Tamil Nadu, the matter appears to have notproceeded further and the 1[st]respondent/writ petitionerapproached the learned Single Bench by filing W.M.P.No.10334 of2020 to extend the time period of twelve weeks' prescribed inthe order or fix some reasonable time. The Court taking note ofthe situation prevailing and also the fact that the Revenueintended to prefer a writ appeal against the order in the writpetition, directed the Settlement Commission to keep the matterin abeyance by interim order dated 25.06.2020. Now, that wehave dismissed the appeal filed by the Revenue, we direct theSettlement Commission to proceed in accordance with law and takea final decision in the matter after affording opportunity ofhearing to the 1[st] respondent. We are not inclined to fix any https://hcservices.ecourts.gov.in/hcservices/ time frame for the Settlement Commission to act and leave it tothe Commission to decide the matter as expeditiously possible.Consequently, there will be no necessity for any further ordersin W.M.P.No.10334 of 2020, which appears to be still pending.No costs. Consequently, connected miscellaneous petition isclosed. Sd/- Assistant Registrar //True Copy// Sub Assistant RegistrarTo1. Income tax Settlement Commission, Additional Bench, Chennai, Ministry of Finance, Department of Revenue, 640, Anna Salai, Nandanam, Chennai-600 035.2. Dispute Resolution Panel-2, Office of the Dispute Resolution Panel, 7[th] Floor, Income tax Office, BMTC Building, 80 Feet Road, Koramangala, Bengaluru-560 095.3. Deputy Commissioner of Income Taxation – 1, Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034.4. Deputy Commissioner of Income Taxation, Circle – 2, Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034.5. Deputy Commissioner of Income Taxation – 1(2), Chennai, 121, M.G.Road, Nungambakkam, Chennai-600 034. Pre-delivery Judgment made inW.A.No.581 of 2020 nrl (co)rr ii (28/09/2020)