2010 (2) TMI 619 - HC - Income Tax

Penalty - TDS Non-deduction of Tax Salary Employee of Japanese company working for assessee Assessee not liable to deduct tax at source on salary received by employees from their Japanese employee Penalty cannot be levied on assessee for non-deduction of tax on such salary

Summary

Issues:
Challenging order of penalty by Revenue against assessee, substantial questions of law framed, deduction of tax at source by Indian company for payments made by foreign company, legality of penalty under section 271(1)(c) of the Act.

Analysis:

1. Challenge to Penalty Order:
The Revenue appealed against the Tribunal's decision setting aside the penalty imposed on the assessee. The appeals covered different assessment years. Substantial questions of law were framed regarding the necessity of the assessee to deduct tax at source for payments by a foreign company without its knowledge.

2. Background and Facts:
The assessee, an Indian food processing company, collaborated with a Japanese company, deputing Japanese employees to India. The controversy arose when the Revenue alleged that the assessee failed to deduct tax at source for payments made by the Japanese company to its employees. The Assessing Officer imposed a penalty under section 271(1)(c) of the Act, leading to the appeals.

3. Assessing Officer's Decision:
The Assessing Officer held that the Indian company should have deducted tax for payments made by the foreign company to its employees deputed to India. The penalty was levied based on this premise, despite the assessee's argument that it only deducted tax on salaries paid directly by the Indian company.

4. Appellate Proceedings:
The Commissioner of Income-tax (Appeals) and subsequently the Tribunal considered the provisions of section 192 and ruled in favor of the assessee. They held that since no payments were made by the Indian company to the Japanese employees, there was no requirement to deduct tax at source for the foreign company's payments.

5. Legal Interpretation and Conclusion:
The High Court analyzed section 192 of the Income-tax Act, emphasizing the requirement for the assessee to deduct tax on payments made by it to employees. The Court noted the absence of evidence that the foreign company's payments were routed through the Indian company. Consequently, the Court ruled in favor of the assessee, stating that no tax deduction was necessary under section 192(1). As there was no violation of this section, the Court dismissed the appeals, affirming the Tribunal's decision to set aside the penalty orders.

In summary, the High Court upheld the Tribunal's decision, ruling in favor of the assessee regarding the deduction of tax at source for payments made by a foreign company to its employees deputed to India. The Court emphasized the legal requirements under section 192 of the Income-tax Act and concluded that since no payments were made through the Indian company, there was no obligation to deduct tax at source, leading to the dismissal of the Revenue's appeals.