2004 (12) TMI 317 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance of penalty under Section 271C of the IT Act, 1961.
2. Exemption of income from salary under Section 10(8B) of the IT Act.
3. Liability of the assessee to deduct tax at source from salaries paid to expatriate employees.
4. Reasonable cause for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Sustenance of Penalty under Section 271C of the IT Act, 1961:
The primary issue in these appeals was the challenge against the sustenance of the penalty imposed by the Assessing Officer (AO) under Section 271C of the Income Tax Act, 1961. The AO had imposed the penalty on the assessee for failing to deduct tax at source from the salaries paid to expatriate employees, amounting to Rs. 3,26,99,128 for various financial years.

2. Exemption of Income from Salary under Section 10(8B) of the IT Act:
The assessee claimed that the income from the salaries of its expatriate employees was exempt under Section 10(8B) of the IT Act. However, the AO rejected this claim based on the following reasons:
- The project should be funded by an international organization as per CBDT Circular No. 621, but the Overseas Economic Co-operation Fund did not qualify as such.
- The agreement relating to the assessee-company was not approved by the prescribed authority as required under Section 10(8B).
- The contracts of services of the employees were not approved by the prescribed authority before the commencement of their services.
- The CBDT office memorandum dated 10th January 2001 explicitly stated that the salary income of the employees did not qualify for exemption under Section 10(8A)/10(8B).

3. Liability of the Assessee to Deduct Tax at Source from Salaries Paid to Expatriate Employees:
The AO held the assessee liable to deduct tax at source from the salaries paid to expatriate employees. The assessee argued that it did not have a policy of paying tax on behalf of its employees and that Section 271C did not apply to payments made outside India by one foreigner to another, even if the services were rendered in India. The AO rejected these arguments and imposed the penalty, stating that the assessee failed to discharge its statutory obligation to deduct tax at source.

4. Reasonable Cause for Non-deduction of Tax at Source:
The assessee contended that it had a bona fide belief that it was not liable to deduct tax at source based on the assurances given by the Government of India in various agreements. The agreements stipulated that the foreign consultants and their staff would be exempt from all taxes, duties, fees, levies, and other impositions under Indian laws. The Ministry of Tourism had also written letters to the assessee confirming that the matter of tax exemption was under study and that the Government would reimburse the taxes if the exemption was not granted.

The Tribunal found that the assessee had a genuine and bona fide belief that it was not liable to deduct tax at source based on the assurances and correspondence from the Government. The Tribunal noted that the matter of tax exemption remained pending for about ten years, and the exemption was only refused in 2001. Therefore, the assessee had a reasonable cause for not deducting tax at source during the financial years under consideration.

Conclusion:
The Tribunal concluded that the assessee had a reasonable cause for not deducting tax at source and was thus prevented from discharging its statutory liability. The Tribunal set aside the order of the CIT(A) and canceled the penalty imposed by the AO under Section 271C. Consequently, all eight appeals filed by the assessee were allowed.