2007 (4) TMI 178 - HC - Income Tax

Penalty Tribunal in his order held that no employer-employee relationship sustained between assessee and expatriates and per diem payments made by assessee to his employer instead of expatriates, hence penalty on ground of non-deduction of tax at source not sustained

Summary

Issues:
1. Whether the assessee had reasonable cause to deduct tax at source on per diem payments.
2. Whether an employer-employee relationship existed between the assessee and the expatriates.
3. Whether penalty levied on the assessee under Section 271C of the Income Tax Act was justified.

Issue 1:
The assessee, running a hotel, entered into an agreement with M/s Hyatt of Hong Kong Ltd. for expatriates' services, including per diem payments. The assessee believed it was liable to deduct tax but was uncertain about the rate. The Assessing Officer issued No Objection Certificates for six financial years, mentioning TDS at 30% was required under Section 115A. A subsequent survey revealed short deduction, which the assessee paid with interest. Penalty proceedings were initiated under Section 271C, resisted by the assessee based on facts presented.

Issue 2:
The question arose whether an employer-employee relationship existed between the assessee and the expatriates. The assessee contended payments were made to M/s Hyatt of Hong Kong Ltd., not individual expatriates, negating an employer-employee relationship. The Tribunal agreed, noting the global services extended by M/s Hyatt of Hong Kong Ltd. The Tribunal found the assessee's actions bona fide, with all relevant facts disclosed, leading to the deletion of penalties imposed by the Assessing Officer and Commissioner of Income Tax (Appeals).

Issue 3:
The Tribunal's factual conclusions were based on adequate material, not deemed perverse by the court. The court upheld the Tribunal's decision, dismissing the appeal. The judgment highlighted the importance of the No Objection Certificates issued, the absence of an employer-employee relationship, and the clarity in payment made to M/s Hyatt of Hong Kong Ltd., not individual expatriates, as key factors in the case.

This detailed analysis of the judgment outlines the issues, the facts presented, the arguments made, and the conclusions reached by the Tribunal and the High Court.