2024 (6) TMI 323 - AT - Income Tax

Penalty levied u/s 271(1)(c) or 270A - taxability of reimbursement of salary expense of seconded employees as FTS - AO in the penalty orders has refused to accept the bonafide intention of the entities for not offering the secondment receipts to tax and for not filing original return offering such receipts (only for cases where original return was not filed) - as considered that secondment of employees to India is used as a tax shifting construct/ arrangement between IBM foreign entities and IBM India - AO in the penalty order has confirmed that the Assessee has concealed particulars of income u/s 271(1)(c) by failing to furnish original return of income u/s 139 and has made full disclosure of income only in the reassessment proceedings u/s 148 HELD THAT - The assessee has offered the said receipts offered during the course of original assessment proceedings or during the return filed u/s 148 of the Act or during the reassessment proceedings. There was no avoiding of the income offered to tax by the assessee. The assessee made a plea before us that though at the time of filing of original return of income or at the time of filing revised return of income, there was a bonafide belief which the assessee is having regarding the taxability of the impugned secondment receipts. At the time of filing original return of income or at the time of revised return of income, there is a doubt in the mind of the assessee regarding taxability of secondment charges. Hence, assessee has not offered the same at earlier stage. However, later, to buy peace, assessee offered the same for taxation. As noted that the issue in dispute with regard to taxability of secondment receipts, there is a judgement of jurisdictional High Court in the case of Abbey Business Services India Pvt. Ltd 2020 (12) TMI 570 - KARNATAKA HIGH COURT wherein held that as evident that the assessee had entered into a secondment agreement for securing services to assist assessee in its business. The expenses incurred by the seconded employees which were reimbursed by the assessee is not liable to deduction to tax at source and the aforesaid amount could not be considered as 'fees for technical services'. It is also pertinent to note that secondment agreement constitutes an independent contract of services in respect of employment with assessee. From the perusal of the key features of the agreement, which have been reproduced by the Commissioner of Income Tax (Appeals), it is evident that the seconded employees have to work at such place as the assessee may instruct and the employees have to function under the control, direction and supervision of the assessee and in accordance with the policies, rules and guidelines applicable to the employees of the assessee. The employees in their capacity as employees of the assessee had to control and supervise the activities of Msource India Pvt. Ltd. Therefore, the assessee for all practical purposes has to be treated as employer of the seconded employees. There is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195 of the Act. Thus the conduct of assessees is bonafide though it was not agreed by the department and it is also noted that assessees have all material time disclosing this secondment receipts in its Form 3CB filed with the department and also with bonafide explanation before the lower authorities regarding not offering the said receipts for taxation, when the assessees itself have voluntarily offered the said receipts for taxation either at the stage of original assessment or at the stage of reassessment or in return filed in response to notice issued u/s 148 of the Act penalty could not be levied. It cannot be construed that assessees have concealed any material facts from the department or furnished inaccurate particulars of income. In our opinion, there is a reasonable cause for not offering the same for taxation in original return filed u/s 139(1) of the Act or in revised return u/s 148 of the Act as the assessees are in bonafide belief that said receipts are not liable for taxation in view of the fact that there are contradictory decisions on this impugned issue. Thus , levy of penalty u/s 271(1)(c) or 270A of the Act in these group cases is not justified. Accordingly, we delete the penalty in all these cases. Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the penalty levied u/s 271(1)(c) of the Income Tax Act, 1961.
2. Sustaining the penalty u/s 270A of the Act.

Summary:

Issue 1: Sustaining the penalty levied u/s 271(1)(c) of the Income Tax Act, 1961

The Tribunal examined the penalties imposed on IBM foreign entities for various assessment years under different categories:

Category A: Penalty u/s 271(1)(c) where original return u/s 139(1) was not filed, and receipts were offered to tax in the return filed u/s 148.

- IBM Canada Limited (AY 2013-14, 2016-17), IBM China Hongkong Limited (AY 2014-15), IBM Israel Limited (AY 2014-15, 2016-17).

Category B: Penalty u/s 271(1)(c) where original return u/s 139(1) was not filed, and receipts were offered to tax during reassessment proceedings.

- IBM Deutschland GMBH (AY 2012-13), IBM Canada Limited (AY 2012-13), IBM Osterreich Internale Buromaschinen Gesellschaft MBH (AY 2012-13), IBM Del Peru SAC (AY 2012-13).

Category C: Penalty u/s 271(1)(c) where original return u/s 139(1) was filed, but secondment related receipts were offered to tax only in the return filed u/s 148.

- Compagnie IBM France (AY 2013-14, 2015-16), IBM Australia (AY 2014-15), IBM Corporation (AY 2016-17), IBM Japan Limited (AY 2013-14, 2015-16, 2016-17), IBM United Kingdom Limited (AY 2014-15, 2016-17).

The Tribunal noted that the assessees had a bonafide belief based on judicial precedents and the favorable order for IBM Corporation for AY 2011-12 that secondment receipts were not taxable. The Tribunal emphasized that penalty cannot be imposed where there is a reasonable cause, and the conduct of the assessees was bonafide. The Tribunal deleted the penalties under u/s 271(1)(c).

Issue 2: Sustaining the penalty u/s 270A of the Act

The Tribunal examined penalties under u/s 270A for various categories:

Category D: Penalty u/s 270A where original return u/s 139(1) was filed, but secondment related receipts were offered to tax only in the return filed u/s 148.

- IBM Corporation (AY 2017-18), IBM Netherland B V (AY 2017-18), IBM United Kingdom Limited (AY 2017-18).

Category E: Penalty u/s 270A where original return u/s 139(1) was not filed, and receipts were offered to tax in the return filed u/s 148.

- IBM Canada Limited (AY 2017-18).

Category F: Penalty u/s 270A where original return u/s 139(1) was filed, and receipts were offered to tax during the assessment proceedings.

- IBM Australia (AY 2018-19, 2019-20).

The Tribunal reiterated that the assessees had a bonafide belief based on judicial precedents and the favorable order for IBM Corporation for AY 2011-12 that secondment receipts were not taxable. The Tribunal emphasized that penalty cannot be imposed where there is a reasonable cause, and the conduct of the assessees was bonafide. The Tribunal deleted the penalties under u/s 270A.

Conclusion:

The Tribunal deleted all penalties levied under u/s 271(1)(c) and u/s 270A, considering the bonafide belief of the assessees and the judicial precedents supporting their position. The appeals of the assessees were allowed.