2019 (3) TMI 1541 - AT - Income Tax

Penalty u/s 271(1)(c) - quantum addition deleted / decided in favour of the assessee by the Tribunal / Hon ble High Court or remanded by Special bench - Income accrued in India - attribution of income to Permanent Establishment (PE) - HELD THAT - Characterization of revenue s earned from supply of embedded software as royalty and the splitting up of the revenue from supply of equipment between hardware and software in favour of the assessee and the decision rendered by special bench has been confirmed by Hon ble Delhi High Court in DIT vs. Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT . It is also not in dispute that qua certain issues (relating to existence of PE / business connection, resulting attribution of income and vendor financing) were remanded back to be decided by the Special Bench and said issue was accordingly decided by the Special Bench 2018 (6) TMI 497 - ITAT DELHI . It is also not in dispute that the lower revenue authorities have relied upon the order passed in A.Y. 1997-98 and 1998-99. However, now the issue has been decided in favour of the assessee very basis of levying the penalty i.e. addition made in the quantum proceedings, have been deleted / decided in favour of the assessee by the Tribunal as well as Hon ble High Court the penalty levied u/s 271(1)(c) is not sustainable having been become infructuous. - Decided in favour of assessee

Issues involved:
1. Appeal against penalty order under section 271(1)(c) of the Income Tax Act, 1961.
2. Characterization of revenue earned from supply of embedded software as 'royalty'.
3. Taxability of income from supply of software as 'business income' or 'royalty'.
4. Deletion of penalty by Commissioner of Income Tax (Appeals) and its sustainability.
5. Two views being possible on tax matters and its impact on penalty imposition.

Issue 1: Appeal against penalty order under section 271(1)(c) of the Income Tax Act, 1961:
The appellant, the Deputy Commissioner of Income Tax, filed an appeal seeking to set aside the penalty order passed under section 271(1)(c) of the Income Tax Act for various assessment years. The grounds of appeal included contentions regarding the cancellation of penalties by the Commissioner of Income Tax (Appeals) and the request for restoration of the Assessing Officer's order.

Issue 2: Characterization of revenue earned from supply of embedded software as 'royalty':
The Tribunal had previously decided on the characterization of revenue earned from the supply of embedded software as 'royalty' in favor of the assessee. This decision was confirmed by the Hon'ble Delhi High Court, establishing a precedent in this regard.

Issue 3: Taxability of income from supply of software as 'business income' or 'royalty':
The controversy revolved around the taxability of income derived from the supply of software as either 'business income' or 'royalty'. The Special Bench and subsequent orders favored the assessee, concluding that the income from the supply of software was not taxable as 'royalty', leading to the deletion of penalties imposed by the Assessing Officer.

Issue 4: Deletion of penalty by Commissioner of Income Tax (Appeals) and its sustainability:
The Commissioner of Income Tax (Appeals) had deleted the penalties levied by the Assessing Officer, accepting the appeals of the assessee. The Tribunal upheld this decision, emphasizing that penalties were not sustainable when the basis for their imposition, such as additions made in quantum proceedings, had been decided in favor of the assessee.

Issue 5: Two views being possible on tax matters and its impact on penalty imposition:
The Tribunal highlighted that when two views were possible on a tax matter and the assessee adopted a favorable view while filing returns, penalties under section 271(1)(c) could not be levied. The Tribunal dismissed the revenue's appeals for subsequent assessment years, as the issues on which penalties were based had been decided in favor of the assessee in earlier years, emphasizing the principle that penalties cannot be imposed when two views are possible.

In conclusion, the Tribunal dismissed the revenue's appeals against the penalty orders, citing precedents, factual findings, and legal principles that favored the assessee. The judgment underscored the importance of consistency in tax treatment, the impact of previous decisions on penalty imposition, and the significance of considering multiple views on tax matters before penalizing taxpayers.

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