Royalty classification of brand fee justified TDS penalty where no reasonable cause was proved

Brand fee paid under a brewing agreement was characterised as consideration for use of brand name and trademarks, amounting to royalty liable to tax deduction at source under section 194J rather than a mere contractual payment under section 194C. Because the assessee produced no tangible material to support its different treatment of the payment and the agreement itself described it as brand fee, the plea of bona fide belief failed. The assessee also did not prove reasonable cause under section 273B. Penalty under section 271C for short deduction of tax at source was therefore upheld and the appeals were dismissed.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was exigible for short deduction of tax at source on brand fee paid under the brewing agreement, and whether the assessee had shown reasonable cause under section 273B of the Income-tax Act, 1961.

Analysis: The payment was found, on the terms of the brewing agreement, to be consideration for use of brand name and trademarks and therefore in the nature of royalty attracting tax deduction at source under section 194J of the Income-tax Act, 1961, and not a mere contractual payment under section 194C of the Income-tax Act, 1961. The assessee failed to place tangible material showing that it had any reasonable basis to treat the payment differently. The plea of bona fide belief was rejected because the agreement itself described the payment as brand fee and there was no factual foundation for treating it as payment for contract work. The assessee also failed to discharge the burden of proving reasonable cause under section 273B of the Income-tax Act, 1961.

Conclusion: Penalty under section 271C of the Income-tax Act, 1961 was upheld and the appeals were dismissed.

Ratio Decidendi: Where tax is short-deducted on a payment correctly characterised as royalty, penalty under section 271C follows unless the assessee proves reasonable cause under section 273B.

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