Orders under section 201(1)/201(1A) quashed for breach of natural justice: taxpayer not given material from Google/Facebook research

HC quashed the TDS assessment orders passed u/s 201(1)/201(1A) against the taxpayer for failure to adhere to principles of natural justice. The court held that while the ITO's independent research into Google/Facebook advertising was not objectionable per se, the material gathered had to be shared with the taxpayer to afford an opportunity to rebut; absence of such disclosure rendered the orders unsustainable. The composite orders were quashed in entirety and the petition disposed of, without expressing view on minor disputed payment elements.

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Issues Involved:
1. Breach of principles of natural justice.
2. Incorrect deduction of tax at source under Section 194C instead of Section 194J of the Income Tax Act.
3. Availability of an alternative statutory appellate remedy.

Detailed Analysis:

1. Breach of Principles of Natural Justice:
The Petitioner, a Private Limited Company, challenged the orders passed by the Income Tax Officer (TDS) on the grounds of breach of principles of natural justice. The core argument was that the Income Tax Officer (TDS) conducted extensive research on the nature of services provided by the Petitioner and the payments made to various agencies but did not share this research with the Petitioner, thereby denying them a fair hearing. The court noted that the Income Tax Officer (TDS) had referred to in-depth research on how digital advertising platforms like Google and Facebook operate, but there was no indication that this information was shared with the Petitioner before the final orders were passed. The court concluded that the failure to share this material with the Petitioner amounted to a breach of natural justice, as it denied the Petitioner an opportunity to rebut the findings.

2. Incorrect Deduction of Tax at Source:
The central dispute was whether the Petitioner should have deducted tax at source under Section 194C (payments to contractors) or under Section 194J (professional or technical services) of the Income Tax Act. The Income Tax Officer (TDS) argued that the services availed by the Petitioner were technical in nature and thus should have been subjected to tax deduction under Section 194J. The Petitioner contended that their deductions under Section 194C were appropriate. The court noted that the Income Tax Officer (TDS) had conducted substantial research into the nature of digital advertising services and concluded that these were technical services. However, this conclusion was reached without giving the Petitioner an opportunity to respond to the research findings, which was a procedural lapse.

3. Availability of Alternative Statutory Appellate Remedy:
The department argued that the Petitioner should have pursued the alternative statutory appellate remedy available instead of directly filing a writ petition. The court addressed this by stating that if there has been a breach of principles of natural justice resulting in a miscarriage of justice, the court is justified in bypassing the statutory appeal remedy and entertaining the writ petition directly. The court found that the breach of natural justice in this case warranted such an approach.

Conclusion:
The court quashed the impugned orders on the grounds of breach of principles of natural justice. The orders were set aside, and the matter was remanded back to the Income Tax Officer (TDS) for fresh consideration. The Petitioner was given six weeks to make a representation along with the desired material before the said authority. The Income Tax Officer (TDS) was directed to take this representation into consideration before passing final orders. The petition was disposed of accordingly.

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