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2016 (1) TMI 680 - AT - Income TaxPenalty u/s Sec. 271C - non deduction of tds on five foreign remittances u/s 195 - (i) Engineering and Draughting services provided by AEC. - (ii) Payments for purchase of shrink wrapped software (i.e. standard computer software) - Held that - It is noted that there is huge controversy on this issue, and therefore, assessee placed reliance on the judgments which were in its favour including the judgment of Hon ble Supreme court in the case of Tata consultancy services 2004 (11) TMI 11 - Supreme Court . It is noted by us that various High Courts and benches of the tribunal have taken contradictory stands on this issue. The assessee has furnished list of various cases for and against the assessee, on this issue. Apparently, assessee adopted one of the views available. Under these circumstances, we are unable to accept the stand of the AO that no controversy was involved on the obligation of the assessee for deduction of TDS on the impugned payments and that view taken by the assessee was not one of the possible view and was not bonafide view, and accordingly there could not have been any reasonable cause for non-deduction of TDS on the impugned payments . In our considered opinion, the decision with regard to the obligation of the assessee for deduction of TDS on the aforesaid payments was highly debatable, in the given facts of the case and legal scenario discussed above. The view adopted by the assessee based upon the certificate of the C.A., was one of the possible views and can be said to be based upon bonafide belief of the assessee. Therefore, under these circumstances we can hold that there was reasonable cause as envisaged u/s 273B for not deducting tax at source by the assessee on the aforesaid payments, and therefore, the assessee was not liable for levy of penalty u/s 271C - Decided in favour of assessee
Issues Involved:
1. Deletion of penalty under Section 271C of the Income Tax Act. 2. Applicability of TDS provisions on foreign remittances/payments. 3. Reasonable cause under Section 273B for non-deduction of TDS. 4. Reliance on CA certificate for non-deduction of TDS. 5. Interpretation of DTAA provisions related to FTS and royalties. Issue-wise Detailed Analysis: 1. Deletion of Penalty under Section 271C: The core issue revolves around the deletion of a penalty amounting to Rs. 11,55,280/- imposed by the Joint Director of Income Tax (JDIT) under Section 271C of the Income Tax Act for the assessment year 2009-10. The Revenue challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)], who had deleted the penalty. The Tribunal had to determine if the CIT(A) was correct in holding that there was a reasonable cause for non-deduction of TDS, thereby justifying the deletion of the penalty. 2. Applicability of TDS Provisions on Foreign Remittances/Payments: The JDIT had initially held that the assessee failed to deduct TDS on several foreign remittances/payments, including: - Rs. 11,80,727/- for engineering and draughting services provided by AEC Technology Ltd., UK. - Rs. 63,27,749/- for engineering services to Lye Singapore Pte. Ltd., Singapore. - Payments for shrink-wrapped software purchases from Insight Technology Solution Pte. Ltd., Q.A. Software, and Software One Pte. Ltd. The assessee did not appeal against the JDIT's order under Section 201/201(1A), accepting it to avoid litigation and maintain peace. However, the assessee argued that no TDS was liable to be deducted on these payments as per law. 3. Reasonable Cause under Section 273B: The Tribunal examined whether there was a "reasonable cause" for the assessee's failure to deduct TDS, as provided under Section 273B. The concept of "reasonable cause" is interpreted as an honest belief founded upon reasonable grounds, which would lead an ordinary prudent person to conclude that the action taken was justified. The Tribunal referred to the Delhi High Court's judgment in Woodward Governor India (P.) Ltd. v. CIT, which emphasized that penalty under Section 271C is not automatic and requires the authority to consider if the failure was due to a reasonable cause. 4. Reliance on CA Certificate for Non-Deduction of TDS: The assessee submitted that the payments were made without deducting TDS based on a CA certificate, which indicated that no TDS was required. The Tribunal noted that reliance on a CA certificate could be considered a reasonable cause, especially when the issue of TDS applicability was debatable. 5. Interpretation of DTAA Provisions Related to FTS and Royalties: The Tribunal analyzed the nature of the payments to determine if they qualified as Fees for Technical Services (FTS) or royalties under the respective Double Taxation Avoidance Agreements (DTAAs): - Engineering and Draughting Services: Payments to AEC Technology Ltd., UK, and Lye Singapore Pte. Ltd., Singapore, were argued not to qualify as FTS under Article 13/12 of the India-UK and India-Singapore DTAAs, respectively, as the services did not "make available" technical knowledge to the assessee. - Shrink-Wrapped Software Purchases: Payments for shrink-wrapped software were argued to be for copyrighted articles, treated as goods rather than royalties, and thus not subject to TDS. The Tribunal acknowledged the controversy and conflicting judgments on this issue, indicating that the assessee's view was one of the possible interpretations. Conclusion: The Tribunal concluded that the issue of TDS applicability on the impugned payments was highly debatable and that the assessee had a bona fide belief, supported by a CA certificate, that no TDS was required. Therefore, there was a reasonable cause for non-deduction of TDS, and the penalty under Section 271C was not justified. The Tribunal upheld the CIT(A)'s order deleting the penalty and dismissed the Revenue's appeal. The judgment emphasizes the importance of reasonable cause and bona fide belief in penalty proceedings under the Income Tax Act.
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