2020 (2) TMI 1287 - HC - Income Tax

Settlement Commission order in terms of Section 245D(2C) - whether the contract is divisible or indivisible is a matter laid before the Commission for consideration? - Commissioner has done in his report is only to reiterate the stand of the Department that the contr acts are, in fact, and in his opinion, indivisible - SC in considering the validity or otherwise of the application proceeds to delve into the merits of the matter even at that stage, concluding that the contract was composite and indivisible and hence the applicant, i.e,. the petitioner herein, had failed to make a full and true disclosure of income. HELD THAT - Certainly, if the Commission decides adverse to the petitioner in final hearing, holding that the contract and transactions were composite and indivisible, there would be an additional tax liability upon the petitioner. This demand however can be raised only once a decision has been rendered in terms of Section 245D(4) by the Commission on the issues posed before it, the first of which is, whether at all the income from offshore supply is liable to tax in India. The question of full and true disclosure and the discharge of tax liability at all stages prior to final hearing, should be seen only in the context of the issues offered for settlement and the remittances of additional tax thereupon. Issues decided by the Commission and liability arising therefrom, will be payable only at the stage of such determination, which, in my considered view, is the stage of final hearing under Section 245D(4). Thus a final order passed by the SC will provide for the terms of settlement that can include any demand by way of tax, penalty or interest as well. Evidently, this demand raised after final settlement, can only refer to such issues as has been decided by the Commission over and above the additional income disclosed and tax paid by the assessee at the time of filing of application. This been envisaged and provided for in the statutory scheme of settlement under the Act. The scheme of Chapter XIX A is to provide a wholistic resolution of issues that arise from an assessment in the case of an assessee that has approached the Commission. Once an assessee has approached the Settlement Commission at the appropriate stage (in the case of this petitioner, there is no dispute on this score) all issues in relation to the assessment for that assessment year are at large before the SC. This is evidently to ensure that a single forum, a high powered one at that, will take into account the submissions of both parties and arrive at a decosopm on all issues that arise from such case/proceeding, in a comprehensive manner. The impugned order of the Settlement Commission is beyond the scope of Section 245D(2C) having been passed on the merits of the issue raised and set aside the same. This Writ Petition is allowed. No costs. Connected Miscellaneous Petitions are closed.

Issues Involved:
1. Validity of the order passed by the Income Tax Settlement Commission (SC) under Section 245D(2C) of the Income Tax Act, 1961.
2. Taxability of income from offshore supply of goods.
3. Determination of total income and tax liability for the petitioner for Assessment Years (AY) 2015-16 to 2018-19.
4. Full and true disclosure of income by the petitioner.

Detailed Analysis:

1. Validity of the Order Passed by the SC:
The petitioner challenged the order passed by the SC under Section 245D(2C) of the Income Tax Act, 1961, dated 09.01.2019. The SC, while considering the validity of the application, delved into the merits of the matter and concluded that the contract was composite and indivisible, thus holding that the petitioner failed to make a full and true disclosure of income. The court found this approach improper, stating that the SC should have first decided the issue of taxability of income from offshore supply before determining the full and true disclosure of income. The court emphasized that the demand for additional tax liability can only be raised after a final decision is rendered under Section 245D(4) by the SC.

2. Taxability of Income from Offshore Supply of Goods:
The petitioner contended that the income from offshore supplies would not be liable to tax in India, as the scope of work under each contract was separate and distinct. The Revenue argued that the bifurcation between offshore supply and onshore supply and services was artificial and aimed at reducing income tax liability. The court noted that the question of whether the contract is divisible or indivisible is a matter for the SC to consider during the final hearing under Section 245D(4).

3. Determination of Total Income and Tax Liability:
The petitioner had filed returns for AY 2015-16 to 2018-19, offering to tax the income from onshore supply and services only. The SC, in its preliminary order, admitted the application for further proceedings but later concluded that the petitioner had not made a full and true disclosure of income. The court clarified that the determination of total income and tax liability should be made by the SC during the final hearing, considering all relevant materials and submissions by both parties.

4. Full and True Disclosure of Income:
The SC initially admitted the petitioner's application, noting that all technical parameters were fulfilled and there was no prima facie material suggesting that the petitioner had not made a full and true disclosure. However, the SC later reversed its stance, concluding that the petitioner failed to disclose the true nature of the contract. The court held that the SC's decision on the disclosure should be made in the context of the issues offered for settlement and the additional tax remittances, which should be finalized during the final hearing under Section 245D(4).

Conclusion:
The court set aside the impugned order of the SC, stating it was beyond the scope of Section 245D(2C) and directed the SC to take up the matter for final hearing under Section 245D(4). The SC was instructed to hear both parties on merits, consider all materials, and pass orders within twelve weeks from the date of the first hearing. The writ petition was allowed, and no costs were imposed.

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