2019 (4) TMI 350 - AT - Income Tax

Levy of penalty u/s 271C - assessee in default in not deducting tax out of payments made u/s 201(1) for purchase of software license and for availing other related software - HELD THAT - The Tribunal in Capgemini Technology Services India Ltd. Vs. DDIT 2019 (4) TMI 308 - ITAT PUNE held that the payments made by assessee for use of software were not taxable as royalty and hence, the assessee has not defaulted in not deducting tax at source out of such payments. Consequently, there is no merit in raising the demand under section 201(1) and charging interest under section 201(1A) of the Act. Similar stand was in respect of subscription charges, etc. Once the assessee has been held to be not in default and demand cancelled under section 201(1), penalty levied under section 271C for such default fails. Hence, the assessee is not liable for levy of any penalty under section 271C of the Act. Hence, grounds of appeal raised by the Revenue are dismissed.

Summary

Issues:
Appeal against deletion of penalty under section 271C of the Income-tax Act, 1961 for assessment year 2007-08.

Analysis:
The appeal concerns the deletion of penalty under section 271C of the Act. The case involves the assessee's failure to deduct tax at source on payments made for software licenses and related services. The Assessing Officer deemed these payments as taxable under the DTAA, holding the assessee in default and levying a penalty. However, the CIT(A) deleted the penalty, prompting the Revenue's appeal.

The Tribunal referred to a similar case, Capgemini Technology Services India Ltd. Vs. DDIT, where it was held that payments for software use were not taxable as royalty. Consequently, the demand under section 201(1) and interest under section 201(1A) were deemed unwarranted. As the assessee was not in default, the penalty under section 271C was also dismissed. The Tribunal concluded that since the demand under section 201(1) was canceled, the penalty for default did not stand. Therefore, the Revenue's appeal was dismissed, and the assessee was not liable for the penalty under section 271C.

In summary, the Tribunal upheld the CIT(A)'s decision to delete the penalty under section 271C, citing the non-taxable nature of the software payments. The judgment emphasizes that once the demand under section 201(1) is canceled due to the non-default status of the assessee, the penalty under section 271C cannot be sustained. Hence, the appeal of the Revenue was dismissed, and the penalty was not applicable in this case.