2023 (10) TMI 612 - AT - Income Tax

Penalty levied u/s 271C - bonafide belief - reasonable cause - failure to deduct the tax at source on discount allowed by the assessee - assessee supplied Pre-paid SIM Card, and recharge vouchers to pre-paid distributors at a discounted price - contradictory pronouncements by different High Courts on this issue - Reasonable cause for such default - HELD THAT - As decided in Idea Cellular Ltd. 2023 (9) TMI 1021 - ITAT INDORE it is undisputed fact that this is debatable issue having two possible views and the assessee was of the view that it was not under obligation to deduct tax at source as per the provisions of chapter XVII of Income Tax and particularly u/s 194H of the tax. This belief of the assessee is one of the possible view and therefore failure to deduct the tax at source in respect of the discount/commission allowed to the distributors in light of divergent decisions by the different High Courts as well as by the different benches of this Tribunal clearly established the genuine and bona fide decision of the assessee not to deduct tax u/s 194H. Hence there was a reasonable cause as provided u/s 273B of the Act to have not deducted TDS on these transactions. No doubt assessee has not specifically submitted before the Tax Authorities that non-deduction of tax at source was based on it's understanding of provisions of section 194H of the Act, which in turn constitutes a 'reasonable cause'. But the fact remains that by the time the assessee was under obligation to deduct tax at source for the AYS under consideration, there were judgments in favour of assessee and even after the decisions of Hon'ble Delhi High Court and Kerala High Court, Hon'ble Karnataka High Court had taken a different view of the matter which implies that non- deduction of tax was based on such understanding of relevant provisions of the Act in which event penalty is not imposable u/s 271C of the Act. We therefore set aside the order passed by AO as well as Ld CIT (A) on this aspect and hold that penalty u/s 271C is not imposable, in the circumstances of the case. Decided in favour of assessee.

Summary

Issues Involved:
1. Penalty under section 271C for non-deduction of tax on discount offered to pre-paid distributors.
2. Whether the discount offered is in the nature of commission under section 194H.
3. Reasonable cause for non-deduction of tax under section 273B.
4. Limitation and legality of penalty for FY 2006-07.

Summary:

1. Penalty under section 271C for non-deduction of tax on discount offered to pre-paid distributors:
The assessee, a telecom service provider, was penalized under section 271C for failing to deduct tax on discounts offered to pre-paid distributors, which the department considered as commission under section 194H. The Ld. CIT(A) upheld this penalty.

2. Whether the discount offered is in the nature of commission under section 194H:
The assessee argued that the discount allowed to distributors was not commission but a sale transaction. The Tribunal acknowledged that this issue is highly debatable with divergent views from various High Courts. Some courts ruled in favor of the assessee, while others supported the revenue's stance that the discount is commission subject to TDS under section 194H.

3. Reasonable cause for non-deduction of tax under section 273B:
The assessee claimed a bona fide belief that no tax deduction was required, supported by differing judicial opinions and pending adjudication before the Supreme Court. The Tribunal referred to the Supreme Court's judgment in Singapore Airlines Ltd. Vs. CIT, which emphasized that penalties under section 271C could be waived if there was a reasonable cause for non-deduction of tax. The Tribunal found the assessee's belief reasonable and bona fide, thus constituting a reasonable cause under section 273B.

4. Limitation and legality of penalty for FY 2006-07:
The assessee contended that the penalty for FY 2006-07 was barred by limitation and was not initiated in the original assessment order. The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The Tribunal concluded that the issue of whether the discount is commission under section 194H is debatable with reasonable cause for non-deduction of tax. Consequently, the penalty under section 271C was deemed unjustified and was deleted. The appeals of the assessee were allowed.