2019 (4) TMI 1371 - AT - Income Tax

Appeal allowed as penalty unjustified under section 271C - Bona fide belief cited

The Tribunal allowed the appeal of the assessee, holding that the penalty under section 271C was not justified due to the bona fide belief of the ... Penalty under section 271C - deduction of tax at source (TDS) - nature of payment - revenue sharing versus commission - limitation under section 275(1)(c) - section 194H - taxability of commission - reasonable cause / bonafide belief - section 273B - waiver of penaltyLimitation under section 275(1)(c) - initiation of penalty proceedings - Whether the penalty order under section 271C was barred by limitation - HELD THAT: - On a reading of the assessment order dated 31.10.2012 and the subsequent correspondence, the Assessing Officer made a reference to the JCIT (TDS) for initiation of penalty proceedings by letter dated 22.01.2013. The Tribunal found that initiation of penalty proceedings occurs by issuance of a notice to the assessee and not merely by the AO s reference. The JCIT (TDS) issued the notice dated 11.02.2013 and the penalty order was passed on 29.08.2013. Applying clause (c) of section 275(1), the Tribunal held that the order was within the period prescribed (six months from end of the month in which action for imposition of penalty is initiated or expiry of the financial year in which the proceedings are completed, whichever is later). The Tribunal rejected the assessee s contention that the AO s assessment order or the AO s reference date should be treated as the date of initiation for limitation reckoning, distinguishing cases relied upon where the AO himself had issued the first notice; here the first notice initiating penalty proceedings was issued by JCIT (TDS). [Paras 9]Penalty order under section 271C held not barred by limitation.Penalty under section 271C - section 194H - commission - nature of payment - revenue sharing versus commission - reasonable cause / bonafide belief - section 273B - waiver of penalty - Whether the payments to the service provider were commission liable to TDS and whether penalty under section 271C could be sustained - HELD THAT: - The Tribunal examined the Memorandum of Understanding and found that payments to the service provider comprised sharing of association fees (50%) and a share of course fees (20%) and involved pooling of the University's academic resources with the service provider s marketing effort to expand distance-education reach. Given the high percentage sharing and the commercial character of the arrangement, the Tribunal considered the question whether such payments were conclusively commission within section 194H to be debatable. On that debatable legal issue, and in view of the assessee s bona fide belief that the payments were revenue sharing (not subject to TDS), coupled with the fact that the assessee, after departmental verification, deposited the TDS with interest, the Tribunal found absence of contumacious conduct required for sustaining a penalty under section 271C. Relying on the principle that penalty requires contumacious or deliberate default and having regard to section 273B, the Tribunal concluded that reasonable cause existed for non-deduction and directed deletion of the penalty. [Paras 15]Penalty under section 271C deleted on grounds of bona fide belief and reasonable cause; payments held to be a debatable question of law as to whether they constituted commission subject to TDS.Final Conclusion: The appeal is allowed: the Tribunal held the penalty order under section 271C was within limitation, but on merits deleted the penalty, finding the characterisation of payments as commission a debatable issue and that the assessee had reasonable cause/bona fide belief and had complied by depositing TDS with interest. Issues Involved:1. Legality of the order passed under sections 250/271C.2. Justification of the penalty levied under section 271C for non-deduction of TDS.3. Classification of revenue shared as commission and its liability for TDS under section 194H.Issue-wise Detailed Analysis:1. Legality of the Order Passed under Sections 250/271C:The appellant contended that the order passed by the JCIT, TDS, was barred by limitation. According to the appellant, the penalty order should have been passed by 30.04.2013, whereas it was actually passed on 29.08.2013. The Revenue argued that the DCIT (TDS) made a reference to the JCIT (TDS) for initiation of penalty proceedings on 22.01.2013, and the penalty proceedings were initiated by a notice dated 11.02.2013. Therefore, the penalty order passed on 29.08.2013 was within the limitation period prescribed under section 275(1)(C). The Tribunal held that the initiation of penalty proceedings should be reckoned from the date of issuance of notice to the assessee, not from the date of reference by the AO to the JCIT (TDS). Hence, the order was not barred by limitation.2. Justification of the Penalty Levied under Section 271C for Non-Deduction of TDS:The appellant argued that the non-deduction of TDS was due to a bona fide belief that the payment was not subject to TDS. The appellant had paid the TDS along with interest after the TDS verification proceedings. The Tribunal referred to the Hon’ble Supreme Court’s decision in the case of CIT vs. Bank of Nova Scotia, which emphasized that for the levy of penalty under section 271C, it is necessary to establish that there was contumacious conduct on the part of the assessee. The Tribunal found that the appellant acted under a bona fide belief and there was no contumacious conduct. Therefore, the penalty under section 271C was not justified.3. Classification of Revenue Shared as Commission and Its Liability for TDS under Section 194H:The Revenue argued that the payment made by the appellant to M/s AD Educational & Research was in the nature of commission for services provided in procuring students, and hence, liable for TDS under section 194H. The appellant contended that the payment was part of revenue sharing under a collaboration agreement and not commission. The Tribunal examined the Memorandum of Understanding (MOU) and found that the payment was more in the nature of revenue sharing rather than commission. The Tribunal concluded that it was a debatable issue and on such an issue, the levy of penalty for non-deduction of TDS could not be justified. The explanation of the appellant that it was under a bona fide belief that such payments did not call for TDS was accepted.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the penalty under section 271C was not justified due to the bona fide belief of the appellant regarding the nature of the payment and the absence of contumacious conduct. The order was pronounced in the open Court on 06/02/2019.