Tax deduction on marketing fees under section 194H depends on audit status; one year remanded, another penalty deleted.

Liability to deduct tax at source on marketing fees or commission under the second proviso to section 194H depends on the relevant tax-audit condition under section 44AB. For assessment year 2016-17, the assessee's liability could not be confirmed because the factual position regarding audit status in the immediately preceding year had not been verified, so the matter was remanded for factual determination. For assessment year 2017-18, the Tribunal accepted that the assessee was not liable to deduct tax at source on the payment and deleted the penalty under section 271C.

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Issues: (i) Whether the penalty under section 271C of the Income-tax Act, 1961 for alleged failure to deduct tax at source on marketing fees paid under section 194H was sustainable for assessment year 2016-17. (ii) Whether the penalty under section 271C of the Income-tax Act, 1961 for the same TDS default was sustainable for assessment year 2017-18.

Issue (i): Whether the penalty under section 271C of the Income-tax Act, 1961 for alleged failure to deduct tax at source on marketing fees paid under section 194H was sustainable for assessment year 2016-17.

Analysis: The assessee followed the project completion method and had not recognised project income during the year. The record indicated that the assessee was not liable for tax audit under section 44AB for the relevant year, but the material fact whether the assessee had been liable for tax audit in the immediately preceding year was not verified. Since the second proviso to section 194H made that verification relevant, the matter required factual examination by the assessing authority.

Conclusion: The issue was remanded for verification and the ground was allowed for statistical purposes.

Issue (ii): Whether the penalty under section 271C of the Income-tax Act, 1961 for the same TDS default was sustainable for assessment year 2017-18.

Analysis: In view of the finding that the assessee was not liable for tax audit under section 44AB for the earlier year, the Tribunal held that the assessee was not liable to deduct tax at source under section 194H on the payment of marketing fees or commission in the subsequent year. The remaining contentions were not adjudicated as unnecessary.

Conclusion: The penalty was deleted and the ground was allowed.

Final Conclusion: The assessee obtained partial relief: one year's dispute was sent back for verification and treated statistically, while the other year was decided in the assessee's favour by deleting the TDS-related penalty.

Ratio Decidendi: Liability to deduct tax under the second proviso to section 194H depends on the relevant tax-audit condition, and where the foundational fact is not verified the matter must be remanded for factual determination.

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