Facts of the Case

The present writ petition was filed by the Revenue challenging the order of the Income Tax Settlement Commission dated 26.10.2017 for Assessment Years 2009–10 to 2014–15.

The respondent, Steag Energy Services GmbH, a Germany-based entity engaged in engineering and nuclear technology services, operated in India through its wholly owned subsidiary. The subsidiary entered into an Operation & Maintenance (O&M) contract with HPL Cogeneration Limited for a power plant project in Haldia, West Bengal.

Part of the contract was subcontracted to the respondent, which deputed personnel to India for technical and engineering services. Subsequently, a survey under Section 133A of the Income Tax Act, 1961 was conducted, following which the respondent approached the Settlement Commission under Section 245C(1).

The Settlement Commission examined multiple issues including permanent establishment, TDS liabilities, royalty on software, and transfer pricing adjustments.

Issues Involved

  1. Whether the respondent violated Section 40(a)(iii) regarding non-deduction/payment of TDS within prescribed time.
  2. Whether payments received for software constituted “royalty” under Section 9(1)(vi) of the Income Tax Act.
  3. Whether exclusion of transfer pricing adjustments relating to the Jharsuguda project was justified.
  4. Scope of judicial interference under Article 226 of the Constitution of India against orders of the Settlement Commission.

Petitioner’s Arguments (Revenue)

  • The Settlement Commission erred in not applying Section 40(a)(iii) despite failure to deduct/pay TDS within time.
  • Payments for software should have been treated as royalty under Explanation 2 to Section 9(1)(vi).
  • The exclusion of transfer pricing adjustments for the Jharsuguda project was arbitrary and lacked rationale, especially when the assessee had accepted adjustments in principle.
  • The Commission’s findings were legally unsustainable and required judicial interference.

Respondent’s Arguments (Assessee)

  • The issues relating to TDS and royalty were already settled by binding judicial precedents.
  • The Settlement Commission correctly evaluated facts and applied settled legal principles.
  • The exclusion of adjustments for Jharsuguda project was justified due to exceptionally high profits already offered to tax.
  • No ground existed for interference under writ jurisdiction.

Court’s Findings / Order

The Delhi High Court dismissed the writ petition filed by the Revenue and upheld the Settlement Commission’s order.

Key observations:

  • Issues relating to TDS and royalty on software were already covered by precedents such as:
    • ANZ Grindlays Bank vs DCIT
    • DIT vs Infrasoft Ltd.
  • On the transfer pricing issue (Jharsuguda project), the Court held that the Settlement Commission had considered relevant facts and exercised its discretion appropriately.
  • The Court reiterated the limited scope of judicial review under Article 226, stating that interference is permissible only in cases of:
    • Manifest legal error
    • Non-application of mind
    • Lack of bona fides
    • Absence of full and true disclosure
  • Reliance was placed on landmark judgments:
    • CIT vs Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC)
    • Brij Lal & Others vs CIT (2011) 1 SCC 1
  • Since none of these conditions were satisfied, the writ petition was dismissed.

Important Clarification

  • The Court emphasized that Settlement Commission orders cannot be routinely interfered with unless there is a clear legal infirmity.
  • High profits in a specific segment can be a valid consideration for excluding transfer pricing adjustments.
  • Software payments do not automatically qualify as royalty unless they satisfy statutory conditions under Section 9(1)(vi) 

Sections Involved

  • Section 9(1)(vi) – Royalty
  • Section 40(a)(iii) – Disallowance for non-deduction of TDS
  • Section 133A – Survey
  • Section 245C & 245D – Settlement Commission Proceedings
  • Article 226 – Writ Jurisdiction of High Court

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:4248-DB/AKC17072018CW72162018.pdf

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