By TIOL News Service

MUMBAI, AUG 31, 2015: THE issue before the Bench is - Whether adducing of additional documents during course of hearing before the Settlement Commission, can be construed as the failure of the assessee to disclose true & full details of its unaccounted income. NO is the answer.

Facts of the case

The assessee is a subsidiary of M/s. Jupiter Networks LLC USA, and is engaged in rendering I.T. related services to its holding company inter alia from its unit registered with both STPI and Non-STPI Units. The assessee was exempted from tax u/s 10A in respect of the profits arising from its STPI unit i.e. 95% of its entire profits. The business model of the assessee was to provide IT services to its holding company at cost + 10%, and the equipments were purchased by the assessee through its holding company. However, at the instance of the Customs department, the assessee enhanced the value of equipments imported from 2006 onwards to Rs.225/- and also recorded it at Customs value in its Books. This resulted not only in depreciation being taken at a higher figure but also the sales being recorded at Rs.225/- + 10% i.e. higher than the actual/real transaction value between the assessee and its holding company. Consequent to a search u/s 132 and notice issued u/s 153A, the assessee filed its return for A.Y 2004-05 to 2009-10, wherein it had wrote back higher depreciation claimed on Rs.225/- but claimed exemption u/s 10A in respect of the same. However, the higher sales revenue i.e. Rs.225+10% continued to be shown. In the said circumstances, the assessee filed an application for settlement for A.Y 2004-05 to 2009-10 with the Commission, claiming the benefit of deduction u/s 10A. The assessee also claimed that the inflated sales i.e. Rs.225/- + 10% in excess of the actual income of Rs.100/- + 10% be ignored. The assessee had declared an additional income of Rs.8.54 Crores for A.Ys 2004-05 to 2009-10 on account of TP adjustment of 5% in respect of STPI unit and 6% of non-STPI units as its transaction value of I.T. Services with its AE i.e., the holding company. Further, on this additional income, no deductions u/s 10A was claimed.

The Commission at the stage of Section 245D(3), directed the Revenue to make a reference to the TPO to determine the ALP and verify the satisfaction of the conditions for grant of exemption u/s 10A. In response, the Revenue filed its Rule 9 report. The Commission thereafter, held that the unbilled revenue (excess sales figures at Rs.225/- + 10%) was not genuine income as it was a mere book entry made by the assessee. The additional income was determined by virtue of TP Adjustment at Rs.76.03 Crores and the impugned order also negatived the contention of the Revenue that the benefit of Section 10A would not be available to the extent of Rs.264 Crores being extra ordinary profits.

Having heard the parties, the High Court held that,

++ it is seen that normally, the income offered for tax in an application for settlement would bind the parties concerned and any revision thereof, would prima facie, be evidence of the original application for settlement not declaring the full income in its original application. However, this is not cast in stone and will depend upon the factual context from case to case to determine whether there was any failure to disclose fully and truly the income. This is particularly so where the correct determination of income is dependant upon the application of the appropriate TP Rule which to an extent is subjective. In such a case, if an additional income is declared during the course of the hearing in view of what emerges during debate before the Commission, it cannot be said that the original application did not make true and full disclosure of its undisclosed income. It is for the Commission to consider on the basis of the facts that emerge before it, whether the original application contained a bonafide true and full disclosure of the Applicant's income or not. In the present case, the additional income was offered by the assessee, only after the Revenue had filed its Rule 9 report and it was only during the course of hearing u/s 245D(4) that the additional income of Rs.59.11 Crores and Rs.3 Crores were offered. This also on accepting the view of the Revenue and without prejudice to their primary contention that the same cannot be added. This acceptance of the further offer only with a view to expeditiously settle the dispute, according to this court, cannot be held against the Revenue;

++ an identical submission as made before this court on behalf of the Revenue was a subject matter of consideration by this Court in Director of Income v/s. Income Tax Settlement Commission, wherein an identical submission was raised by the Revenue with regard to failure to make true and full disclosure. It was further held therein that a "full and true" disclosure of income, which had not been previously disclosed by the assessee, being a precondition for a valid application u/s 245C(1) does not contemplate revision of the income so disclosed in the application. Moreover, if an assessee is permitted to revise his disclosure, in essence, he would be making a fresh application. In this regard, section 245C(3) which prohibits the withdrawal of an application once made u/s 245C(1) is instructive inasmuch as it manifests that an assessee cannot be permitted to resile from his stand at any stage during the proceedings. Therefore, by revising the application, the applicant would be achieving something indirectly what he cannot otherwise achieve directly and in the process rendering the provision of section 245C(3) otiose and meaningless. These observations of Apex Court equally apply to the present case. Therefore we do not agree with the submission of the Revenue that there has been a failure to disclose truly and fully undisclosed income in the settlement application in the peculiar facts of the Revenue's case. So far as the other objection is concerned viz failure to disclose the manner in which this income has been derived, we find that the application for settlement sufficiently explains the source of the income being declared. The application mentions how the additional income which is being disclosed has been derived i.e. on application of the ALP in respect of exports made to its AEs. The other jurisdictional objection to the impugned order urged by the Revenue is the grant of immunity from penalty and prosecution u/s 245H;

++ the attention of this court is invited to the impugned order to contend that the question of unbilled revenue was not raised in its application for settlement but raised only during the course of the hearing. This is factually not correct. In fact in the statement of facts filed by assessee along with the application for settlement does mention that in so far as the income which has been disclosed as per P&L A/c is at a higher figure and the applicant cannot reduce its income, whether it would remain taxable as such or on its being abated could a lower figure be is a circumstance which deserves consideration by the Commission. In any event on consideration of the submissions made before it, the impugned order records its satisfaction in respect of all the three prerequisites for grant of immunity from penalty and prosecution. Thus the immunity from penalty and prosecution was granted only on satisfaction of the jurisdictional requirements. This satisfaction has not been shown to be perverse. The last grievance of the Revenue is that the impugned order is bad on merits. It is submitted that concepts like real income have been invoked when the same has no application. It is noted that only upon application of the principle that real income is income which has really accrued or arisen to the assessee that is taxable, the Commission has come to the conclusion that unbilled revenue was only a book entry and no real income accrued or arose. This view of the Commission in the impugned order cannot be said to be perverse in the least. Therefore, there seems no reason to interfere with the impugned order of the Commission.

(See 2015-TIOL-1999-HC-MUM-IT )