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Non-deduction of tax will not attract penalty u/s 271C if assessee furnishes reasonable explanation for such default: ITAT

2019-TIOL-1620-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘E’ NEW DELHI

ITA No.3366/Del/2015
Assessment Year: 2003-04

ITA No.3367/Del/2015
Assessment Year: 2004-05

ITA No.3368/Del/2015
Assessment Year: 2005-06

VODAFONE IDEA LTD
(FORMERLY KNOWN AS IDEA CELLULAR LTD)
A-19, MOHAN CO-OPERATIVE INDUSTRIAL ESTATE
MATHURA ROAD, NEW DELHI – 110044
PAN NO:AAACB2100P

Vs

ASSISTANT COMMISSIONER OF INCOME TAX
TDS RANGE-50, NEW DELHI 4TH FLOOR
LAXMI NAGAR DISTT. CENTRE, NEW DELHI-110092

N K Billaiya, AM & Suchitra Kamble, JM

Date of Hearing: July 03, 2019
Date of Decision: July 10, 2019

Appellant Rep by: Sh Ronak Doshi, CA
Respondent Rep by: 
Ms Rinku Singh, Sr. DR

Income Tax – Sections 194H,201(1), 201(1A), 271C & 274(1)

Keywords – Penalty – Principal agent relation – Telecommunication services

(A) THE assessee is engaged in the business of providing cellular mobile telephone services to its subscribers. A Survey was conducted on the premises of the company at Delhi and statement of General Manager Finance and Account was recorded on oath. During the assessment for AY 2003-04, the AO held that the transaction between Idea Cellular Ltd. and its prepaid distributor is that Principal and Agent at all times and prepaid distributor is merely selling the prepaid SIM Card and Recharge Coupons on behalf of the Idea Cellular Ltd. Therefore, the AO held that as a logical conclusion, various discounts, bonus offer to the prepaid distributor false bill within the definition of commission and liable to deduction u/s 194H. Order u/s 201(1)/201(1A) was passed for AY 2003-04 and the matter was referred to ACIT for initiation of penalty proceedings u/s 271C.

(B) On appeal, the CIT(A) uphold the order of the AO. Accordingly the assessee filed appeal to the Tribunal which was allowed in favour of assessee. Against this order the revenue filed appeal in the High Court, New Delhi and the High Court decided the issues in favour of the revenue. Hence, the necessary appeal effect was given the order of the High Court for both subsequent FYs 2004-05, 2005-06 and the notice for penalty u/s 271C was accordingly revised. Consequently, the AO passed penalty order u/s 271C read with section 274(1). On appeal, the CIT(A) dismissed the appeal.

On appeal, the Tribunal held that,

Whether penalty u/s 271C can be imposed for non-deduction of tax if there is a reasonable cause for any failure on the part of the assessee for not performing such act – NO: ITAT

++ the issue on which the penalty u/s 271C is imposed is debatable as different courts have taken diverse views. Therefore, the fact remains that the assessee has reasonable cause for non deduction of tax at source on the discount allowed to the prepaid distributor as there are decisions of the High Courts and Tribunal taking diverse views. Thus, it is contesting issue and the assessee has reasonable cause not to deduct the tax at source. Therefore, the action of non deduction of tax in the present case will not attract the penalty u/s 271C. Since this issue is decided in case of assessee’s own case for earlier AYs will be followed for subsequent AYs also.

Assessee’s appeals allowed

ORDER

Per: Suchitra Kamble:

These three appeals are filed by the assessee against the orders dated 20.03.2015 passed by CIT(A)-41, New Delhi for assessment years 2003-04, 2004-05 and 2005-06.

2. Grounds of appeals are as under:-

ITA No. 3366/Del/2015 (A.Y. 2003-04)

Ground no. 1 : Passing of order barred by limitation u/s 275 of the Act

1. On the facts and in circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals)-41, New Delhi (“CIT(A)”) erred in not annulling the penalty order passed u/s 271C of the Income Tax Act, 1961 (“the Act”) by the Additional Commissioner of Income, Range 50, New Delhi (“the TDS Officer”) which was barred by limitation u/s 275 of the Act.

2. The Appellant prays that, the penalty order, being time barred be annulled/set aside as being ab-initio void and bad in law.

WITHOUT PREJUDICE TO GROUND I

GROUND NO. II :

1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the TDS Officer in levying penalty amounting to Rs. 10,73,990/- u/s 271C of the Act on the alleged ground that the Appellant has failed to deduct tax at source u/s 194H of the Act.

2. He failed to appreciate and ought to have held :

a) the Appellant had acted under an honest and bona fide belief that tax was not deductible u/s 194H of the Act on “discount” (alleged by the department as “commission”) given to distributors;

b) Appellant’s stand was also approved by the Hon’ble Tribunal before the Hon’ble High Court reversed those decisions and therefore there was a “reasonable cause”.

c) There was a “reasonable cause” for non-deduction of TDS and in view of section 273B of the Act, no penalty can be levied.

d) Without Prejudice, if the mechanism to deduct TDS fails in absence of ‘payment’ or ‘credit’, there is a ‘reasonable cause’ for non-deduction of TDS u/s 194H of the Act.

3. The Appellant prays that the penalty amounting to 10,73,990/- levied u/s 271C of the Act be deleted.

GROUND NO. III

The Appellant craves leave to add, to alter and/or amend, withdraw all or any of the foregoing grounds of appeal.”

ITA No. 3367/Del./2015 (A.Y. 2004-05)

GROUND NO. I: Passing of order barred by limitation u/s 275 of the Act

1. On the facts and in circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals) – 41, New Delhi (“CIT(A)”) erred in not annulling the penalty order passed u/s 271C of the Income Tax Act, 1961 (“the Act”) by the Additional Commissioner of Income, Range 50, New Delhi (“the TDS Officer”) which was barred by limitation u/s 275 of the Act.

2. The Appellant prays that, the penalty order, being time barred be annulled/set aside as being ab-initio void and bad in law.

WITHOUT PREJUDICE TO GROUND I
GROUND NO. II:

1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the TDS Officer in levying penalty amounting to Rs. 30,76,179/- u/s. 271C of the Act on the alleged ground that the Appellant has failed to deduct tax at source u/s. 194H of the Act.

2. He failed to appreciate and ought to have held:

a) the Appellant had acted under an honest and bona fide belief that tax was not deductible u/s. 194H of the Act on “discount” (alleged by the department as “commission”) given to distributors;

b) Appellant’s stand was also approved by the Hon’ble Tribunal before the Hon’ble High Court reversed those decisions and therefore there was a “reasonable cause”.

c) There was a “reasonable cause” for non-deduction of TDS and in view of section 273B of the Act, no penalty can be levied.

d) Without Prejudice, if the mechanism to deduct TDS fails in absence of ‘payment’ or ‘credit’, there is a ‘reasonable cause’ for non-deduction of TDS u/s 194H of the Act.

3. The Appellant prays that the penalty amounting to 30,76,179/- levied u/s. 271C of the Act be deleted.

GROUND NO. III:

The Appellant craves leave to add, to alter and/or amend, withdraw all or any of the foregoing grounds of appeal.

ITA no. 3368/Del./2015 (A.Y. 2005-06)

Ground No. 1 :

1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals)-41, New Delhi (“CIT(A)”) erred in upholding the action of the Additional Commissioner of Income, Range 50, New Delhi (“the TDS Officer”) in levying penalty amounting to Rs. 62,00,145/- u/s 271C of the Income Tax Act, 1961 (“the Act”) on the alleged ground that the Appellant has failed to deduct tax at source u/s. 194H of the Act.

2. He failed to appreciate and ought to have held :

a) the Appellant had acted under an honest and bona fide belief that tax was not deductible u/s. 194H of the Act on “discount” (alleged by the department as “commission”) given to distributors;

b) Appellant’s stand was also approved by the Hon’ble Tribunal before the Hon’ble High Court reversed those decisions and therefore there was a “reasonable cause”.

c) There was a “reasonable cause” for non-deduction of TDS and in view of section 273B of the Act, no penalty can be levied.

d) Without Prejudice, if the mechanism to deduct TDS fails in absence of ‘payment’ or ‘credit’, there is a ‘reasonable cause’ for non-deduction of TDS u/s 194H of the Act.

3. The Appellant prays that the penalty amounting to 62,00,145/- levied u/s 271C of the Act be deleted.

GROUND No. II :

The appellant craves leave to add, to alter and/or amend, withdraw all or any of the foregoing grounds of appeal.”

3. During the hearing the Ld. AR submitted that as regards ground no. 1 and 2 for assessment year 2003-04 and 2004-05 the same are not pressed. Therefore, ground no. 1 and 2 for assessment years 2003-04 and 2004-05 are dismissed.

4. We are taking up assessment year 2003-04 as the facts are identical in all the three assessment years.

5. The brief facts are that the assessee is engaged in the business of providing cellular mobile telephone services to its subscribers. In the course of its business, it appoints various Distributors the assessee is admittedly paying service tax on the telecommunications services provided to the ultimate subscribers. The assessee supplied prepaid cards i.e. Subscriber Identification Module and Recharge Vouchers (“SIM/RV”) to its Distributors at a discounted price. The Distributors are free to resupply them to the retailers at any price subject to the maximum retail price. It is the distributor who pays the discounted price to the assessee and there is no payment of any kind made by the assessee to the distributor for the above transaction. The distributors are required to pay the assessee company, the discounted price of the products purchased by them in the advance irrespective of the fact that whether such products purchased are in tern sold or are remained unsold. The deductor company, M/s Idea Cellular Ltd. started his commercial operation in November, 2002. A Survey was conducted u/s 133(A) of the IT Act, 1961 on the premises of the company at Delhi on 24.03.2003. Statement of General Manager Finance and Account was recorded on oath. The Assessing Officer vide order dated 13.02.2004 held that the transaction between Idea Cellular Ltd. and its prepaid distributor is that Principal and Agent at all times and prepaid distributor is merely selling the prepaid SIM Card/Recharge Coupons on behalf of the Idea Cellular Ltd. The Assessing Officer held that as a logical conclusion, various discounts, bonus offer to the prepaid distributor false bill within the definition of commission and liable to deduction u/s 194H accordingly company was held liable to pay through deduction/non-deduction u/s 201(1) and interest u/s 201(1A) of the Income Tax Act, 1961. Order u/s 201(1)/201(1A) was passed for assessment year 2003-04 on 13.02.2004 and the matter was referred to additional CIT for initiation of penalty proceedings u/s 271C of the Act. The assessee filed appeal before the CIT(A) and CIT(A) vide order dated 31.03.2005 uphold the order of the Assessing Officer. Accordingly the assessee filed appeal to the Tribunal which was allowed in favour of assessee vide order dated 28th March, 2008. Against this order the revenue filed appeal in the Hon’ble High Court, New Delhi and the Hon’ble High Court vide order dated 19.02.2010 decided the issues in favour of the revenue and against the assessee. Accordingly necessary appeal effect was given the order of the Hon’ble High Court for both financial years and the notice for penalty u/s 271C was accordingly revised on 20.01.2011. The Assessing Officer passed penalty order at a section 271C read with section 274(1) of the Act.

6. Being aggrieved by the penalty order the assessee filed appeal before the CIT(A) which was dismissed by the CIT(A).

7. The Ld. AR submitted that it is a settled position in law that penalty u/s 271C of the Act cannot be imposed if there is a reasonable cause for any failure on the part of the assessee as referred to various provisions of the Act. Section 273B of the Act clearly states that no penalty shall be imposed on the person or assessee, as the case may be, for any failure referred to in the said provisions. If he proves that there was reasonable cause for the said failure. The Hon’ble Jurisdiction of Delhi High Court in case of Woodward Governors India Private Ltd. Vs. CIT (253 ITR 745) = 2003-TIOL-849-HC-DEL-IT. The Assessee appointed prepaid distributors. An agreement is executed between them. The Distributor is communicated discounted price of various products like SIM/Recharge Vouchers. The Distributor communicates its purchase order to the Assessee and pays the discounted price upfront in advance to the Assessee. The Assessee post receipt of the money, deliver the products to the Distributor who thereafter resells to Retailers/etc. Thus, for example, MRP of a product is Rs.100 and Discounted Price is Rs.80. The Distributor pays Rs.80 in advance. Thereafter, there is no financial transaction between Assessee Distributor. The Distributor is not accountable to Assessee as to at what price it sold to Retailer. Thus, it is not the case that he first sells to Retailer, recovers price and then retains his commission and only remits the net sum. The Assessee is unaware of what price he resells, when he resells etc. The Assessee’s reasonable cause for non-deduction of tax at source U/S. I94H was based on the following:

– Relationship between Assessee and Distributor was on Principal to Principal and hence in absence of Principal and Agent relationship, section 194H would not apply; This view was affirmed by the Tribunal and then reversed by the Hon’ble High Court; While the Hon’ble Delhi High Court decided against by stating that services cannot be bought and sold, the Karnataka High Court states that right to avail telecom services and be bought and sold.

– Without prejudice, in absence of payment or credit by the Appellant of Rs.20/- and Appellant not being person responsible to pay any income to Distributor, again section 194H does not apply as mechanism to deduct TDS fails. Reliance is placed on:

i. M. S. Hameed Vs. Director of State Lotteries (249 ITR 186) (Ker.) as subsequently affirmed by the Divisional Bench and the Hon’ble Supreme Court;

ii.CIT Vs. Qatar Airways (332 ITR 253) (Bom.);

iii. Piramal Healthcare Ltd. Vs. ACIT (21 taxmann.com 225) (Trib-Mumbai) = 2012-TIOL-297-ITAT-MUM as subsequently affirmed by the Hon’ble Bombay High Court in CIT vs. Piramal Healthcare Ltd (ITA Nos. 1427, 1428, 1545. 1622 of 2012 and 15 of 2013);

iv. SRL Ranbaxy Ltd. Vs. ACIT (2011) (50 SOT 173) (TDel) = 2012-TIOL-19-ITAT-DEL

– Lastly, the Department stand is that the Appellant should have collected say Rs.82 (Rs.80 discounted price and Rs.2. being 10% TDS on Rs.20 i.e MRP Rs.100 Less Discounted Price). Appellant humbly submits that this argument would import TCS provisions u/s.206C into I94H

8. The Ld. AR further relied upon the decision of Delhi Tribunal in the case of ITO vs. G. B. Morrison Travels (P.) Limited (99 TTJ 117). In that case, penalty was imposed on the assessee (carrying on the business as travel agents for various airlines) under section 271C of the Act for not deducting tax under section 194H on discount given by it to its sub-agents. Further, the Ld. AR relied upon the decision of Hon’ble Allahabad High Court in the case of CIT (TDS) Vs GM Telecom, BSNL (ITA No. 39 of 2014) = 2014-TIOL-344-HC-ALL-IT where on similar facts the High Court held in favour of the Assessee confirming the Tribunal’s action of deletion of levy of penalty u/s 271C of the Act on the ground that the reasonable cause within the meaning of section 273B of the Act had been shown by the assessee by relying on the decision of Delhi ITAT in case of Idea Cellular Ltd vs. DCIT (121 TTJ 352) = 2008-TIOL-739-ITAT-DEL. Thus, the Lucknow Tribunal and thereafter the Hon’ble Allahabad High Court has deleted penalty u/s 271C of the Act by relying on the Delhi Tribunal’s decision in the assessee’s case, despite department’s reference to the decision of Calcutta High Court (which has in turn considered Delhi High Court decision). Since, the transactions under consideration relate to FY 2002-03, 2003-04 and 2005-06 for which initially ITAT decided in favour and where the High Court decided against in February 2010, no penalty is leviable u/s. 271C. The Ld. AR submits that the fact that as of date, there are High Courts and Tribunal taking contrary view- and fact that SLP has been admitted, itself shows that assessee has a reasonable cause for non deduction of tax at source on the discount allowed to the Prepaid Distributor. The Ld. AR further prayed that penalty levied u/s 271C of the Act deserves to be deleted.

9. The Ld. DR relied upon the penalty order and the order of the CIT(A).

10. We have heard both the parties and perused all the relevant material available on record. The issue on which the penalty u/s 271C is imposed is debatable as different courts have taken diverse views. Therefore, the fact remains that the assessee has reasonable cause for non deduction of tax at source on the discount allowed to the prepaid distributor as there are decisions of the Hon’ble High Courts and Tribunal taking diverse views. Thus, it is contesting issue and the assessee has reasonable cause not to deduct the tax at source. Therefore, the action of non deduction of tax in the present case will not attract the penalty u/s 271C. Since this issue is decided in case of assessee’s own case for earlier assessment years the same will be followed.

11. In result, appeals of the assessee are allowed.

(Order pronounced in the Open Court on 10.07.2019)

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