2016 (8) TMI 822 - HC - Income Tax

Penalty levied u/s.271C - non deduction of tds - Held that - The assessee could not be faulted if it thought that its own determination of what would be the income of the Canadian and UK Companies were not conclusive of its liability to deduct tax from the provisions. Such belief appears to have been held by the assessee bona fidely. The bona fide belief is fortified when the assessee deducted and paid tax in October 2005 when it received invoices and remitted the service charges. In respect of the U.K. Company, no formal agreement was executed even later also, as in the case of the Canadian Company. This strengthens the assessee s claim that it was under the bona fide belief that tax was deducted only when service charge was determined by a specific agreement and were paid. There was no prompting by the Department and assessee had made the payment voluntarily. In this background, it would be relevant to refer to a judgment of the Apex Court in the case of CIT v. Eli Lilly and Co. (India) P. Ltd., 2009 (3) TMI 33 - SUPREME COURT . In that case, it has been held that liability to pay penalty u/s.271C can be fastened only on the person who does not have good and sufficient reason for not deducting tax at source and the burden, of course, will be on that person to prove such good and sufficient reason. - Decided in favour of the assessee

Summary

Issues:
1. Whether the Appellate Tribunal was right in reversing the order passed by CIT(A) and deleting the penalty levied u/s.271C of the Act?

Analysis:
The Tax Appeal was filed against an order passed by the Income Tax Appellate Tribunal, which raised the issue of whether the Tribunal was correct in reversing the order by CIT(A) and deleting the penalty under section 271C of the Income-tax Act, 1961. The appellant, a subsidiary of a German company, received services from a Canadian company and a UK company. The appellant made provisions for service charges and audit fees, with TDS amounting to ?97,59,312. The appellant paid TDS of ?77,59,000 but was treated as a defaulter for the shortfall. The penalty was levied under section 271C for failure to deduct tax. The Tribunal allowed the appeal challenging the penalty but dismissed other appeals. The Revenue appealed against this decision.

The court considered the provisions of Section 271C, stating that a penalty could only be levied if no reasonable cause was shown for the failure to deduct tax, with the burden of proof on the assessee. The appellant argued that it believed the amounts did not represent income accrued to the Nonresident Companies and thus did not deduct tax. The court noted that the appellant voluntarily paid TDS in October 2005 before any Departmental proceedings, indicating a bona fide belief. It was observed that the appellant determined the payable amounts to foreign companies without specific agreements, which could explain the failure to deduct tax.

The court found that the appellant acted in good faith and had a genuine belief that tax deduction was required only upon specific agreements for service charges. The court referenced a Supreme Court judgment stating that penalty under section 271C applies only when there is no good and sufficient reason for not deducting tax at source. Based on the facts and legal principles, the court dismissed the appeal, ruling in favor of the assessee and against the Revenue. The question raised was answered in favor of the assessee, and the appeal was disposed of with no costs awarded.