2017 (7) TMI 1076 - HC - Income Tax

TDS u/s 194H and/or 194J - arrangement worked out between the assessee company and the distributor (Agency) - withhold tax at source under S. 194H in respect of sales to its distributors, which are on principal to principal basis and wherein property in the goods is transferred to the distributor - Held that - Section 194H pre-supposes the payment to be made to the third party namely, Distributor or the Agency and if on a close scrutiny of Section 182, Distributor is not an agent, therefore, in our considered opinion, the provisions of Section 194H have wrongly been invoked, and therefore, the first issue is answered in favour of assessee and against the Department. Tribunal justification in ignoring the statutory books of accounts, the auditors report and the certificate issued by the auditors and merely relying on the internal Management Information System records in coming to the conclusion on the nature of the dealings with the distributors - Held that - Management Information System was not a part of their books of accounts nor could have been relied upon by the Income Tax Authorities. The basis on which the proceedings were initiated, in our considered opinion, the Statutory Audit Report is final conclusion over the authorities under the Income Tax Act, therefore, the second issue is required to be answered in favour of the assessee.

Issues Involved:
1. Whether the assessee was liable to withhold tax at source under Section 194H of the Income Tax Act, 1961.
2. Whether the Tribunal was justified in ignoring statutory books of accounts and relying on internal Management Information System records.
3. Whether interest under Sections 201(1A) and 220(2) of the Income Tax Act should be levied when taxes had already been paid by the distributor(s).
4. Whether the notice proposing penalty was time-barred and the order levying penalty under Section 271C of the Act was void ab initio.
5. Whether the liability of payment of tax can be fastened under Section 201 apart from the liability of interest and penalty.
6. Whether TDS is applicable under Section 194J on roaming charges paid for facilities provided by service providers.

Detailed Analysis:

1. Liability to Withhold Tax at Source under Section 194H:
The Tribunal misdirected itself by considering the relationship between the company and the distributor as one of principal and agent. The Tribunal relied on the Management Information System records instead of the statutory audit report, which was deemed final. The Tribunal's conclusion that the amount was paid as commission was erroneous since no payment was actually made by the assessee company. The relationship between the company and the distributor was on a principal-to-principal basis, and the restrictions on the distributor did not change this relationship. Therefore, the provisions of Section 194H were wrongly invoked.

2. Ignoring Statutory Books of Accounts:
The Tribunal erred in relying on the internal Management Information System records instead of the statutory books of accounts and the auditor's report. The statutory audit report should have been considered final, and the Management Information System records were not a part of the official books of accounts. Therefore, the Tribunal's reliance on these records was misplaced.

3. Levy of Interest under Sections 201(1A) and 220(2):
Since the amount was not required to be deducted under Section 194H, any proceedings under Sections 201 or 201(1A) were misconceived. The taxes had already been paid by the distributor(s), and therefore, the levy of interest under these sections was not justified.

4. Penalty under Section 271C:
The penalty provisions under Section 271C were not applicable as the amount was not required to be deducted under Section 194H. The Supreme Court's decision in CIT vs. Eli Lilly & Co. (India) P. Ltd. was cited, which stated that penalty should not be imposed if there was a reasonable cause for the failure to deduct tax at source. Therefore, the penalty levied under Section 271C was void ab initio.

5. Liability of Payment of Tax under Section 201:
The liability of payment of tax under Section 201 could not be fastened as the amount was not required to be deducted under Section 194H. The Tribunal's conclusion that the assessee was liable for the payment of tax under Section 201 was incorrect. The liability of interest and penalty under Section 201 was also not applicable.

6. TDS on Roaming Charges under Section 194J:
The Tribunal's conclusion that TDS was applicable under Section 194J on roaming charges was incorrect. The roaming charges paid for facilities provided by service providers did not involve human intervention and were managed automatically by machines. Therefore, the provisions of Section 194J were not applicable to the roaming charges.

Conclusion:
All the issues were answered in favor of the assessee and against the department. The Tribunal's findings were based on incorrect interpretations and reliance on non-statutory records. The relationship between the company and the distributor was on a principal-to-principal basis, and no tax was required to be deducted under Section 194H. The levy of interest and penalty under Sections 201, 201(1A), and 271C was not justified. The appeals filed by the assessees were allowed, and those filed by the department were dismissed.

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