2012 (7) TMI 221 - AT - Income Tax

ITAT upholds deletion of penalty under Section 271C for non-resident payments

Deputy Director of Income-tax (International Taxation) -2(1) Versus Satellite Television Asian Region Ltd.

The ITAT upheld the CIT(A)'s decision to delete the penalty under Section 271C, as the assessee had a genuine belief that no tax was deductible on ... Penalty u/s 271(1)(c) - failure to deduct tax at source - assessee, a non-resident company having its principal place of business at Honkong, did not deduct tax at source on payments made to various Channel Companies, which are also non-resident companies based in Honkong - assessee contended non-requirement to deduct TDS on the payment made by a non-resident to a non-resident u/s 195 - In view of the decision in the case of Eli Lilly & CO. Ltd (2009 (3) TMI 33 (SC)), wherein it was held that if the assessee had a bonafide belief that it was not required to deduct tax at source even if the amount is held taxable later on will not result in levy of penalty u/s 271C, it is held that no penalty u/s 271C can be levied - Decided against Revenue. Issues Involved:1. Deletion of penalty under Section 271C for non-deduction of tax at source.2. Assessee's bonafide belief regarding non-taxability of channel companies in India.3. Limitation period for initiating penalty proceedings.4. Requirement of application under Section 195(2) for payments made to non-residents.5. Business connection of channel companies in India.Issue-wise Detailed Analysis:1. Deletion of penalty under Section 271C for non-deduction of tax at source:The department appealed against the CIT(A)'s decision to delete the penalty imposed under Section 271C for the assessee's failure to deduct tax at source. The CIT(A) had canceled the penalty, stating that the assessee had a bonafide belief that no tax was deductible on payments made to channel companies, which were non-residents and not taxable in India. The ITAT upheld the CIT(A)'s decision, emphasizing that the assessee had disclosed all relevant facts and had a genuine belief based on judicial precedents and authoritative commentaries.2. Assessee's bonafide belief regarding non-taxability of channel companies in India:The assessee, a non-resident company, believed that payments to channel companies, also non-residents, were not taxable in India and thus did not require TDS under Section 195. This belief was supported by the ITAT Mumbai Bench's decision in Shree Kumar Poddar and the commentary in Kanga & Palkhivala's book. The ITAT noted that the issue was complex and debatable, and recent judicial pronouncements, including the Supreme Court's decision in Vodafone International Holdings, supported the assessee's position.3. Limitation period for initiating penalty proceedings:The CIT(A) rejected the assessee's contention that the penalty proceedings were barred by limitation, following the Special Bench decision in Mahindra & Mahindra. The ITAT did not find any fault with this aspect of the CIT(A)'s order.4. Requirement of application under Section 195(2) for payments made to non-residents:The department argued that the assessee should have sought the Assessing Officer's permission under Section 195(2) before making payments to non-residents. However, the ITAT held that the failure to make such an application did not automatically render the gross amount taxable, as supported by the Supreme Court's decision in GE India Technology Centre. The ITAT also noted that the law had evolved, and the Supreme Court in Vodafone had clarified that Section 195 does not apply to payments between non-residents.5. Business connection of channel companies in India:The Assessing Officer had held that the channel companies had a business connection in India and were thus taxable, requiring TDS under Section 195. The ITAT, however, referenced the Delhi High Court's decision in Asia Satellite Telecommunications, which supported the view that telecasting signals via satellite does not constitute a business connection in India. This further reinforced the assessee's bonafide belief that no TDS was required.Conclusion:The ITAT upheld the CIT(A)'s decision to delete the penalty under Section 271C, concluding that the assessee had a genuine and reasonable cause for not deducting tax at source. The department's appeals were dismissed, and the ITAT emphasized that the complex and debatable nature of the legal issues involved justified the assessee's belief and actions.