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2012 (8) TMI 577 - AT - Income TaxPenalty - Deduction of tax at source - Payment to non-residents - Penalty u/s 271C of the IT Act - lower deduction of tax - assessee contended that it received Nil deduction certificate issued by DDIT (International Taxation), being the Assessing Officer of the Contractor Company - assessee company obtained confirmation letter from the DDIT (International Taxation), confirming the above certificate Held that - Assessee acted bona fidely and not deducted tax from payment made to the Contractor Company under the specific contract - section 273B of the Act does not make a levy of penalty under section 271C of the Act mandatory - assessee would not be liable to penalty if he is able to prove that there was a reasonable cause for failing to deduct the tax - certificate earlier issued u/s 194C (4) of the IT Act and clarification thereof issued by DDIT (International Taxation), Chennai, was of the bona fide belief that it was required to deduct TDS u/s 194C of the IT Act and not u/s 195 of the IT Act which is applicable in case of non-resident penalty set aside - appeal of the assessee is allowed.
Issues Involved:
1. Validity of certificates issued under Section 194C versus Section 195 of the IT Act. 2. Applicability of Section 271C penalty for non-deduction of TDS. 3. Existence of reasonable cause under Section 273B for non-deduction of TDS. 4. Partial relief granted by CIT(A) and its justification. Issue-wise Detailed Analysis: 1. Validity of Certificates Issued Under Section 194C versus Section 195 of the IT Act: The primary issue revolves around the validity of the certificates issued under Section 194C for Nil deduction of TDS, instead of Section 195, which is applicable for payments to non-residents. The assessee received certificates from the DDIT (International Taxation), Chennai, for Nil deduction under Section 194C, valid till 31-03-2003. The AO, however, held that since the contractor is a non-resident, the applicable section is 195, making the certificates under Section 194C invalid. Consequently, the AO levied interest under Section 201(1A) and issued a rectification order under Section 154, revising the demand. 2. Applicability of Section 271C Penalty for Non-Deduction of TDS: The JCIT (International Taxation) levied a penalty under Section 271C amounting to Rs. 3,52,96,067/- for the shortfall in TDS deduction. The penalty was based on four specific payments made by the assessee without deducting the appropriate TDS. The assessee argued that it acted in good faith based on the Nil deduction certificate issued by the DDIT (International Taxation), Chennai. 3. Existence of Reasonable Cause Under Section 273B for Non-Deduction of TDS: The assessee contended that there was a reasonable cause for not deducting TDS, as it relied on the certificates issued by the tax authorities. The CIT(A) partially accepted this argument, confirming the penalty for two payments but canceling it for the other two. The tribunal noted that the assessee acted on the bona fide belief that it was required to deduct TDS under Section 194C, supported by the certificates and confirmation letters from the DDIT (International Taxation), Chennai. 4. Partial Relief Granted by CIT(A) and Its Justification: The CIT(A) confirmed the penalty to the extent of Rs. 1,73,50,660/- and deleted the balance penalty for two payments made on 03-05-2002 and 18-05-2002. The tribunal upheld this decision, noting that the assessee had a reasonable cause for deducting TDS at 2% under Section 194C due to the certificates issued by the tax authorities. The tribunal also noted that the penalty under Section 271C is not automatic and should consider the existence of reasonable cause. Conclusion: The tribunal concluded that the assessee had a reasonable cause for not deducting TDS under Section 195, as it relied on certificates issued under Section 194C by the tax authorities. The tribunal upheld the CIT(A)'s decision to cancel the penalty for two payments and confirmed the partial relief granted. The appeal of the revenue was dismissed, and the appeal of the assessee was allowed.
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