Penalty u/s 271C not imposable as reasonable cause shown for non-deduction of TDS (2023)

Bharti Airtel Limited Vs JCIT (ITAT Indore)

ITAT Indore held that non-deduction ofTDSdue to genuine and bona fide belief is reasonable cause under section 273B and accordingly penalty u/s 271C not imposable.

Facts-The assessee is a telecom service provider engaged in providing services in Madhya Pradesh and Chhattisgarh. During the course of its business the assessee appoints the distributors for issuing and sale of pre-paid SIM card and recharge vouchers. The department initiated the proceedings u/s 201 & 201(A) of the Income Tax Act due to failure on the part of the assessee to deduct tax on the amount allowed by the assessee to its distributors/dealers which in the opinion of the department was in the nature of commission and therefore was subjected to TDS u/s 194H of the Act.

AO has passed the orders for various assessment years u/s 201 and 201(A) of the Act treating the assessee as assessee in default. Simultaneously, the AO initiated the proceedings of penalty under section 271C of the Act for default of non-Deduction of TDS on the amount allowed to the distributors/dealers being commission. Therefore the AO was of the view that assessee has committed a default in compliance of provision of section 194H of the Act and consequently liable to be charged with penalty u/s 271C of the Act. Ld. AO has finally levied the penalty vide order dated 1st August 2013 passed u/s 271C equivalent to the tax which the assessee has failed to deduct in compliance to chapter XVII.

The assessee challenged the action of the AO before the Ld. CIT(A) but could not succeed.

Conclusion-In the case of Idea Cellular Ltd. it is held that this is debatable issue having two possible views and the assessee was of the view that it was not under obligation to deduct tax at source as per the provisions of chapter XVII of Income Tax and particularly u/s 194H of the tax. This belief of the assessee is one of the possible view and therefore failure to deduct the tax at source in respect of the discount/commission allowed to the distributors in light of divergent decisions by the different High Courts as well as by the different benches of this Tribunal clearly established the genuine and bona fide decision of the assessee not to deduct tax u/s 194H. Hence there was a reasonable cause as provided u/s 273B of the Act to have not deducted TDS on these transactions.

Section 271 C, no penalty shall be imposed on the person or the assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax. The burden, of course, is on the person to prove such good and sufficient reason.

FULL TEXT OF THE ORDER OF ITAT INDORE

These four (4) appeals by the assessee are directed against the four separate orders of Ld. Commissioner of Income Tax (Appeals) (in short Ld. CIT(A)-II, Indore all dated 01.03.2018 arising from penalty levied u/s 271C of the Income Tax Act for A.Y. 2007-08 to 2010-11 respectively. The assessee has raised common grounds in these appeals, the grounds raised for A.Y. 2007-08 are reproduced as under:

1. The Ld CIT(A) erred on facts and in law in upholding the order ofthe Joint Commissioner of Income-tax (TDS) (JCIT), Indore whereinpenalty under section 271C of the Income-tax Act, 1961 was levied onthe appellant.

2. The Ld. CIT(A) erred on facts and in law in confirming the levy ofpenalty under section 271C for non-deduction of tax on discountoffered to pre-paid distributors on sale of pre-paid recharge vouchersand start-up kits under section 194H.

2.1 The Ld. CIT(A) erred in confirming the levy of penalty despite ofthe fact that substantial question of law is involved in the issue ofnon-deduction of tax on discount offered to pre-paid distributors onsale of pre-paid recharge vouchers and start-up kits under section1 94H

2.2 The Ld. CIT(A) erred in confirming the levy of penalty despite ofthe fact that various High Court judgments delivered in favor of theappellant exists on records 2.3 The Ld CIT(A) erred in confirming the levy of penalty despite of the fact that the subject issue is presentlypending before the Hon’ble Supreme Court of India for adjudication 24The Ld. CIT(A) erred in not appreciating that admission of appeals onthis issue before the High Courts and Supreme Court clearlyevidences that this issue involves substantial question of law andhence, is a debatable issue.

2.5. The Ld. CIT(A) erred in not considering the provisions of Section 273B which provide that the penalty under section 271C cannot belevied in case there is a reasonable cause for non-deduction of tax.

2.6 The Ld. CIT(A) erred in not appreciating the involvement of substantial question reasonable cause for non-levy of penalty undersection 271 C

3. The Ld. CIT(A) erred in not following the ratio laid down byJurisdictional tribunal wherein the Hon’ble Indore tribunal deletedlevy of penalty since substantial question of law in context of thesubject issue was pending before the High Court.

3.1 The Ld. CIT(A) erred in not following the decision of jurisdictionalITAT in the case of Shri Yugal Kishore Jajoo (ITA No. 272/Ind/201 1)wherein the Hon’ble bench relying upon the decision of Hon’ble Delhi High Court in matter of CIT vs Liquid Investment and Trading Co.,deleted the penalty levied since substantial question of law ispending before the High Court.

4. Without prejudice, the penalty levied by the Ld. JCIT for FY 2006-07 is barred by limitation within the provisions of section 275(1)(a).

5. Without prejudice, the penalty levied by the Ld. JCIT for F.Y. 2006-07 is bad in law as no penalty was initiated in the originalassessment order passed by the Assessing Officer.

2. The assessee is a telecom service provider engaged in providing services in Madhya Pradesh and Chhattisgarh. During the course of its business the assessee appoints the distributors for issuing and sale of pre-paid SIM card and recharge vouchers. The department initiated the proceedings u/s 201 & 20 1(A) of the Income Tax Act due to failure on the part of the assessee to deduct tax on the amount allowed by the assessee to its distributors/dealers which in the opinion of the department was in the nature of commission and therefore was subjected to TDS u/s 194H of the Act. The Ld. AO has passed the orders for various assessment years u/s 201 and 201(A) of the Act treating the assessee as assessee in default. Simultaneously, the AO initiated the proceedings of penalty under section 271 C of the Act for default of non-Deduction of TDS on the amount allowed to the distributors/dealers being commission. Therefore the AO was of the view that assessee has committed a default in compliance of provision of section 1 94H of the Act and consequently liable to be charged with penalty u/s 271C of the Act. Ld. AO has finally levied the penalty vide order dated 1^stAugust 2013 passed u/s 271C equivalent to the tax which the assessee has failed to deduct in compliance to chapter XVII of T. Act. The assessee challenged the action of the AO before the Ld. CIT(A) but could not succeed.

3. Before the Tribunal the Ld. Sr. counsel of the assessee has submitted that the assessee supplied Pre-paid SIM Card, and recharge vouchers to pre-paid distributors at a discounted price. Distributors are free to re-supply then to the Retailer subject to Maximum Retail Price (MRP). The retailer in turn would supply the same to ultimate subscriber against any price subject to MRP. Thus, the distributors have to pay discounted price in advance to the assessee before delivery of SIM and recharge coupon supplied by the assessee. The assessee would deliver the SIM/RV to the distributors only after receipt of the advance payment on discounted price. He has explained the nature of transactions by narrating the facts that the assessee is not assuring any profit of the distributors on the transactions of sale and purchase of SIM Card/RV. The income/loss of the distributors would be depend on the price on which they are supplying to the retailer as well as the expenditure incurred by them. Therefore, these are the transactions of sale by the assessee and the discount allowed by the assessee to the distributors is not in the nature of commission. He has further submitted that on the issue whether this discount allowed by the assessee to the distributors falls in the ambit of commission and thereby in the mischief of the provision of section 1 94H has been considered and decided by this tribunal as well as Hon’ble High Courts in a series of the decisions. There are differences of opinion on this issue by the Hon’ble High Courts wherein some of the High Courts have decided this issue in favour of the assessee and some other High Courts have decided against the assessee. This is highly debatable issue and now pending adjudication before the Hon’ble Supreme Court in the SLP filed by the assessee as well as department. Since this is a debatable issue and assessee was under thebona fidebelief that there was no obligation to deduct tax on this transaction u/s 194H of the Act. Ld. Sr. Counsel for the assessee has relied upon the judgment of Hon’ble Supreme Court in case ofSingapore Airlines Ltd. Vs. CIT, New Delhi 449ITR 203 (SC)and submitted that the liability of levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. The Ld. Sr. counsel for the assessee has submitted that since the assessee was having a bona fide belief that it is not required to deduct tax on these transactions u/s 194H of the Act and it is only because of difference of opinion between the assessee and the revenue, the penalty has been levied by the AO.

4. Thus he has contended that in view of the provisions of section 273B, no penalty u/s 271C shall be levied when this issue has been contested right from the AO to the Hon’ble Supreme Court and there were diversion views on the point whether the discount allowed by the assessee is in the nature of commission attracting the provision of section 194H and thereby assessee could be responsible for deducting tax at source. The assessee has good and sufficient reason for non-deducting the tax at source and therefore, there was a reasonable cause for failure to deduct the tax at source which is cover u/s 273B of the Act.

5. He has also relied upon the judgment of Hon’ble Allahabad High Court in case of CIT-TDS vs. G.M. (Telecom), BSNL dated 13.02.2014, Income Tax Appeal no.39 of 2014 and submitted that there was a decision in assessee’s own case on the issue of liability of assessee to deduct at source u/s 194H and consequently, the assessee was under bona fide belief that no tax was liable to be deducted on the alleged commission/discount which constitute a reasonable cause for such

6. Sr. counsel for the assessee also relied upon the judgment of Hon’ble Rajasthan High Court in case of Hindustan Coca Cola Beverages Pvt. Ltd. v. Commissioner of Income 402 ITR 539 and submitted that the penalty levied u/s 271C is not sustainable and liable to be deleted.

7. On the other hand, Ld. DR has submitted that the assessee was very much aware about the various decisions on this issue that the assessee is under obligation to deduct TDS as per the provision of section 194H and therefore the assessee cannot take a plea that it was underbona fidebelief that not required to deduct the tax at source in respect of the commission paid to the distributors. He has relied upon the orders of the authorities

8. We have considered rival submission as well as relevant material on An identical issue arising from identical facts and circumstances has been considered and decided by This Bench vide even date order in case ofIdea Cellular Ltd. ITA No.261/Ind/2018 & ITANo.266 to269/Ind/2018as under:

“8. We have considered rival submission as well as relevant materialon record. There is no dispute that whether the transaction ofallowing discount/commission to the distributors by the assessee as well as other telecom service providers for sale of SIM Card and prepaid Recharge Vouchers would fall in the ambit of section 1 94H or notis a highly debatable issue as there are a series of decisions of thistribunal, as well as various High Courts on this point. Some of the judgment of Hon’ble High courts are in favour of the assessee and some are in favour of the revenue upholding that the transactions ofsale of SIM Card and Recharge vouchers are in the nature of sale and discount allowed by the assessee to the distributors is in the nature of commission attracting the provision of section 1 94H and consequently, the assessee was rightly held as deemed to be an assessee is in default as per the provision of section 201 of the Act. Similarly, a good number of other decisions have held that transaction in question does not fall in the ambit of section 1 94H and thereby the assessee was not liable to deduct TDS at source on these transactions. Apart from a series of decisions of this Tribunal there are divergent views of Hon’ble High courts on this issue of liability of the assessee to deduct tax u/s 1 94H, some of those decisions are as under:

In favour of the assessee

(i).Bharti Airtel Ltd. Vs. DCIT Bangalore (2015) 372 ITR 33(Karnataka)

(ii) Hindustan Coca Cola Beverage P. Ltd. Vs. CIT (2018) 402 ITR 539 (Rajasthan)

(iii) CIT vs. Dex Travel P. Ltd. 172 Taxman 142 (Delhi)

60. The ambit of “reasonable cause” underSection273Brequires our scrutiny before we reach the conclusion that the Assessing Officer is required to also calculate potential penalties to be levied against the Assessees. This Court in Eli Lilly & Co. (Supra) had elaborated, in the passage extractedbelow, on the context in whichSection 273Bmay be utilized:

94…Section 273Bstates that notwithstanding anythingcontained inSection 271 C,no penalty shall be imposed on theperson or the assessee for failure to deduct tax at source ifsuch person or the assessee proves that there was areasonable cause for the said failure. Therefore, the liability to levy of penalty can be fastened only on the person who do nothave good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax. The burden, of course, is on the person to prove such good and sufficient reason.

95. In each of the 104 cases before us, we find that non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head “Salaries” being exigible to deduction of tax at source underSection 192was a nascent issue… The taxdeductorassessee was under a genuine and bona fide belief that it was not under any obligation to deduct tax at source from the home salary paid by the foreign company/HO and, consequently, we are of the view that in none of the 104 cases penalty was leviable underSection271Cas the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source.

61. We find some parallels between the facts of the presentcase and the situation in Eli Lilly & Co. (Supra). The liability ofan airline to deduct TDS on Supplementary Commission hadadmittedly not been adjudicated upon by this Court when the controversy first arose in AY 200102. While learned Counsel for the Revenue, Mr. Kumar, has notified us that various airlines were deducting TDS underSection 1 94Hat that time, this does not necessarily mean that the position of law was settled. Rather, it appears to us that while one set of air carriers acted under the assumption that the Supplementary Commission would come within the ambit of the provisions of theIT Act,another set held the opposite view. The Assessees before usbelong to the latter category. Furthermore, as we havehighlighted earlier, there were contradictory pronouncementsby different High Courts in the ensuing years which clearly highlights the genuine and bona fide legal conundrum that wasraised by the prospect ofSection 194Hbeing applied to the Supplementary Commission.

62. Hence, there is nothing on record to show that theAssessees have not fulfilled the criteria underSection 273Bofthe IT Act. Though we are not inclined to accept theircontentions, there was clearly an arguable and “nascent” legalissue that required resolution by this Court and, hence, therewas “reasonable cause” for the air carriers to have notdeducted TDS at the relevant period. The logical deduction from this reasoning is that penalty proceedings against the airlinesunderSection 271Cof the IT Act stand quashed.

12. The Hon’ble Supreme Court after considering an arguable andnascent legal issue that required resolution by the Apex Court hasheld that there was a reasonable cause for the airlines who have not deducted TDS at the relevant period and consequently the penalty proceedings u/s 271C were quashed. In case of the assessee before us the issue involved in the quantum proceeding holding the assessee as assessee in default for non-deduction of tax at source u/s 194H of the Act and consequently, was liable to pay the tax u/s 201 & 201(A) of the Act has travelled up to the Hon’ble Supreme Court and pending adjudication. The nature of the said issue itself highlights genuine and bona fide belief on the part of the assessee for not deducting tax at source on these transactions as the said issue has undergone the various stages of examination and pronouncements resulting divergent decisions at the level of this Tribunal as well as at the level of the Hon’ble High Courts and finally reached to the Hon’ble Supreme Court for final resolution. The Hon’ble Allahabad High Court in the case of CIT-TDS vs. GM (Telecome) BSNL (supra) has also considered the issue of levy of penalty u/s 271C on the identical facts in para 5 as under:

5. There can be no dispute about the fundamental principle oflaw that ignorance of law is no excuse. Section 273B of the Act, however, stipulates that notwithstanding anything contained in Section 271C, no penalty shall be imposed on a person or assessee for any failure to deduct tax at source, if it is proved that there was a reasonable cause for such failure. That the assessee was liable to deduct tax at source is beyond dispute. The only issue is as to whether reasonable cause for a failure to deduct tax at source under Section 1 94H had been shown. The CIT(A) has exercised his discretion particularly having regard to the fact that at the relevant time, there was a decisionin Idea Cellular Ltd. (supra) and in view whereof the assesseewas under a bona fide belief that tax was not liable to bededucted on commission/trade discount. This is, at least, a possible view to take and which has been sustained by theTribunal. In fact, it must be emphasised that the Tribunal has not laid down the proposition that ignorance of law can furnishan excuse for non-deduction of tax at source and the learnedcounsel is right in saying that this proposition would beunsustainable. However, this is a case where, on a review of facts, it was found that a reasonable cause had been shownunder Section 2738. Hence, the imposition of penalty whichwas deleted by the CIT(A) has been affirmed by the Tribunal. 6.The appeal filed by the revenue, in these circumstances, willnot give rise to any substantial question of law. It is,accordingly, dismissed.”

13. Delhi Bench of the Tribunal in case of Vodafone Idea Ltd. New Delhi vs. ACIT-TDS (supra) while considering this issue of levy ofpenalty u/s 271C has held in para 10 as under:

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

14. Similar in another decision in case of Vodafone Idea Ltd. NewDelhi vs. DCIT-TDS (supra) vide order dated 29.09.2017 the Allahabad Bench of the Tribunal has decided this issue in para 98and 99 as under:

98. This takes us to the penalty levied by TDS Officer u/s 271 Cof the Act. The case of assessee is that under similarcircumstances the ITAT Hyderabad Bench (2009) [317 ITR(A. T.) 176] vide its order dated 26.02.2009 had taken a viewthat the relationship between a cellular operator and distributoris on ‘principal to principal’ basis and ‘discount’ given by theassessee cannot be considered as ‘brokerage’ or ‘commission’.It had also taken support of an earlier decision of the ITATDelhi Bench passed on 28.03.2008 [313 ITR (A.T.) 55] wherebyit was concluded that the provisions of section 20 1(1) and201(1A) are not applicable, under identical circumstances. Insuch an event of matter – since the decision of ITAT Delhi Bench was already available before the commencement of Previous Year relevant to Assessment Year 2010-2011 the assessee’s stand that it need not deduct tax at source can be taken as a ‘reasonable cause’. Hon’ble Supreme Court, in the case of in the case of CIT vs. Eli Lilly (312 ITR 225), observed that if non-deduction of tax at source took place on account of controversial addition and if the tax deductor was under genuine and bonafide belief that it was not under any obligation to deduct tax it amounts to ‘reasonable cause’ and penalty u/s 271 C is not leviable. Hon’ble Delhi High Court in the case of Woodward Governors India Private Limited (supra) observed that the expression “reasonable cause” has to be understood in the backdrop of the circumstances of each case and if an assessee does not deduct tax, based on its understanding of a particular provision, the same may constitute a ‘reasonable cause’. Similarly, Hon’ble Delhi High Court, in the case of Pradeep Agencies Joint Venture (supra), observed that when a later judgment is in favour of the assessee, which matches the line of thinking of the assessee it can be considered as a ‘reasonable cause’.

99. No doubt assessee has not specifically submitted before the Tax Authorities that non-deduction of tax at source was based on it’s understanding of provisions of section 1 94H of the Act, which in turn constitutes a ‘reasonable cause’. But the fact remains that by the time the assessee was under obligation to deduct tax at source for the AYS under consideration, there were judgments in favour of assessee and even after the decisions of Hon’ble Delhi High Court and Kerala High Court, Hon’ble Karnataka High Court had taken a different view of the matter which implies that non- deduction of tax was based on such understanding of relevant provisions of the Act in which event penalty is not imposable u/s 271C of the Act. We therefore set aside the order passed by AO as well as Ld CIT (A) on this aspect and hold that penalty u/s 271C is not imposable, in the circumstances of the case.

15. In view of the facts and circumstances of the case as discussedabove as well as binding precedence of Hon’ble Supreme Court,Hon’ble High Courts and decisions of the Coordinate Benches of thisTribunal in assessee’s own case, the penalty levied by the AO u/s271 C is not justified and liable to be deleted. We order accordingly.

Accordingly to maintain the rule of consistency, we hold that the penalty levied by the AO u/s 271C of the Act is not justified and liable to be deleted. We order accordingly.

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

Order pronounced in the open court on 03.05.2023.