TMI Blog1999 (5) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... firming the penalty levied by the Dy. CIT under s. 271C of the IT Act for the alleged default of non-deduction of tax at source under s. 192 of the IT Act. 4. That the appellant company craves leave to amend, add, delete or withdraw any of the foregoing grounds of appeal either before or at the time of the hearing of this appeal." 3. The facts, in brief, as stated are that the assessee-company is a non-resident company incorporated inJapanhaving its head office inTokyo. The assessee-company set up Anpara "B" Thermal Power Project Office inIndiafor execution of the contract for construction of 2 x 500 MW. Anpara "B" Thermal Power Plant at Anpara, in U.P. This project was completed in 1994 and the power plant was handed over to the Government of U.P. Its project office was located at 5th floor, Hotel Le Meridian,New Delhi. The company had brought a number of Japanese technicians with expertise of construction of power plant inIndiaand they were paid monthly salary in Indian currency and therefrom tax was deducted at source and deposited to the credit of the Government of India as per the requirement of s. 192 of the IT Act. 3.1. The company also maintained an office inIndiaat 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng no positive response the Asstt. CIT carried out survey at its premises on6th Nov., 1995, and in the course of survey, according to the Asstt. CIT, incriminating documents evidencing undisclosed salary payments to expatriates were found and copies thereof were obtained. According to the Asstt. CIT no official of the company was available at the time of survey. Consequently general manager of project office attended in response to summons issued earlier and in the course of examination he admitted to have received payment inJapanover and above what was shown to have been received inIndia. Thereafter the company in its letter dt.13th Nov., 1995, intimated that the details required are being collected from the head office inJapanand the same would be furnished as soon as received from head office. The Asstt. CIT pursued the matter and as a result the project office finally submitted complete particulars of payments made to expatriates abroad in its letter dt.31st Jan., 1996, and also agreed to pay the short tax deducted. The tax deductor finally in its letter dt.21st March, 1996, and29th March, 1996, stated that the company has paid additional tax of Rs. 6,91,92,288 on the salary of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as is evident from the sequence of events narrated earlier, M/s Mitsui Co. had denied making any payment to expatriates abroad, other than what was disclosed inIndia. These repeated denials disprove the company s claim that TDS was not deducted fully earlier because the deductor was not certain about the taxability of such payments abroad; (ii) as is clear from the correspondence between the Asstt. CIT and M/s Mitsui Co. the disclosure was far from voluntary. In fact, the company had come out with the full facts only after the General Manager of the Power Project Office was examined on oath. (iii) the fact that no order under s. 201 was passed before payment of short tax deducted and interest thereon by the deductor, is not relevant because the Asstt. CIT had already established by his investigations that the deductor had defaulted in deducted tax at source. 3.5. The Dy. CIT noted that penalty proceedings under s. 271C are independent of default within the meaning of s. 201 of the IT Act. Sec. 271C provides for penalty as a consequence of failure to deduct tax at source. Whether such default is determined by an order under s. 201 or by enquiry and investigation is extrane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) disposed of all the appeals preferred for the financial years 1989-90 to 1994-95 by his consolidated order dt.25th Oct., 1997. Not satisfied with the explanation offered, the CIT(A) confirmed the penalties levied under s. 271C in the cases of project office as well as the liaison office for the financial years 1989-90 to 1994-95 with the following observations: "37. I have considered the facts and circumstances and the submissions of the authorised representative and views of the Department in respect of these 12 appeals. The main contention of the appellant s authorised representative is that the appellant is not liable to deduct tax at source from the payment of that part of salary which is paid overseas to its expatriate employees deputed to India, though, admittedly such salary is taxable in India, on the ground that jurisdiction of the IT Act does not extend beyond India to foreign countries. It is however, to be noted that this may be true in a case where the employer foreign company has no presence inIndia. However, in the appellant s case it has a presence inIndiaby way of its liaison office as well as its project office. The appellant company is operating inIndiathrou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contention that the Asstt. CIT is required to pass an order under s. 201 before a penalty under s. 271C can be levied as once there is a failure to deduct tax or any part of the tax as required to be deducted by or under the provisions of Chapter XVII-B, the liability to penalty arises unless such failure is proved to be for a reasonable cause as required under s. 273B of the IT Act. It may be stated that the appellant could have availed of the voluntary disclosure scheme also for foreign employers but the appellant neither availed of the benefit of declaration under the scheme nor did it seek any clarification despite announcement of the scheme, nor did it disclose particulars of salary paid overseas in its return of TDS. For so many years, the appellant has not been able to prove a reasonable cause for its failure as required under s. 273 of the IT Act. In this view of the matter all the 12 penalties imposed are confirmed and all the 12 appeals are dismissed." 4. The assessees involved are now in appeal before us against the above finding given by the CIT(A) confirming the penalties levied under s. 271C of the IT Act. The learned counsel representing the tax deductors S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments made for service rendered inIndiatax was duly deducted at source and paid into Indian treasury. All compliances to the Indian tax laws were made and separate tax account number (TAN) obtained. As regards the retention/continuation pay in Japan, since the technicians were being paid separately for services rendered in India the amount was advisedly not treated as taxable in India and apropos no tax was deducted at source therefrom as the provisions governing deduction of tax at source did not apply in such a situation as machinery provisions governing deduction of tax at source did not have any extra territorial operation. The amount was paid inJapanout of accruals which had no link whatsoever with the Indian venture. The amount paid were also at no time debited to the accounts of the Indian ventures. 4.2. The learned counsel has further submitted that separate accounts were being maintained for each venture inIndiaand that each constitutes a separate employer having obtained separate tax deduction account number and accepted by the Department. 4.3. Mr. Syali has further submitted that s. 271C inter alia, provides for penalty where there is failure on the part of a perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is extraneous to the levy of penalty under s. 271C. 4.5. While in the case of the liaison office, penalties were levied on the following allegations: "(a) Payment of short tax deducted was made after being confronted as investigation on Anpara was in progress. (b) Payment of taxes were obtained after persistent efforts of the Department. (c) There were false denials by Anpara Power Project of not having paid. (d) There was marked disinclination on part of Anpara Power Project to part with true and full particulars. (e) The fact that no order has been passed under s. 201 is not relevant." 4.6. According to the learned counsel in both the orders, the reasonable cause pleaded that the non-deduction was because of the advice given to the appellant to the effect that TDS provisions did not apply and the amounts paid inJapanunconnected with Indian funds/amounts did not attract tax, was not adjudicated upon by the Dy. CIT. Further, detailed submissions were made before the CIT(A) pointing out factual and legal fallacies in the orders of the Dy. CIT and CIT(A) repeated the factual inaccuracies in the orders of the Dy. CIT as per details below: "(a) Although in a case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice vitiating penalty levied. (2) It is noted in the order that head office of the company is located at 5th floor, Le Meridian Hotel, Janpath, and site office is at Anpara nearVaranasi. It is on record that Mitsui Co. Ltd. as such does not have its head office inIndia. It rather maintains separate offices for its different projects with permission of the RBI. The office referred to is the head office of Anpara Power Project and not that of Mitsui Co. (3) It is also noted that Mitusi Co.have not paid any salary or any income to the expatriates abroad. This is also incorrect because the denial was by Anpara Project office in reply to notice of Asstt. CIT dt.28th March, 1995, and it was for and on behalf of Anpara only. This is also clear from later events which indicate beyond doubt that all the information had to be gathered fromJapanfor furnishing to the Asstt. CIT. (4) It is noted that Asstt. CIT in his letter of8th Aug. 1995, asked for further details and documentary evidence. It is important to note that the requirements of the letter dt.8th Aug., 1995, were not the same as requirements of earlier requisitions dt.28th March, 1995. Although in reply to letter dt. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information. 4.9. Para 7 of the order showing aftermath of the recording of the statement gives an impression as if the appellant did not want to furnish the details. The contents of the letter referred to in the said paragraph thus belie the assertion looking to the correspondence the conclusion reached in para 9 of the order that the collection of short tax deducted was after detection is not correct. The Dy. CIT has confused the entire issue by comparing alleged voluntary compliance with existence of a reasonable cause. It had been consistent submission of the appellant that they were advised that: (a) the amount paid outsideIndiawas not taxable inIndia; (b) without prejudice the provisions governing deduction of tax at source did not apply. 4.10. These submissions were well submitted and have not been adversely commented upon by either the Dy. CIT or the CIT. The causes given are reasonable and its deemed acceptance vitiates penalty levied. Liaison office: 4.11. As regards the liaison office, only one notice was issued on12th Dec., 1995, in response to which after taking due extension complete details were filed. Even the allegation of alleged initial denials does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as non-cooperative and having an acceptable cause Sequoia Construction Co. (P) Ltd. Sons. vs. P.P. Suri, ITO (1985) 47 CTR (Del) 277 : (1986) 158 ITR 496 (Del), Detecon Indian Project Office vs. ITO Ors. (1995) 123 CTR (Del) 416 : (1994) 210 ITR 260 (Del). (v) The person, who, admitted having received certain amounts inJapan, namely, the general manager was the person who signed the letter of8th May, 1995, denying Anpara Project having made any payment. One must give credence to Japanese English and also the fact that at the point of time the direct/relevant question was asked, he did not hesitate in giving the true particulars. Contemporaneity thus verifies the stand of the appellant. A post facto analysis cannot lead to any other conclusion. It was voluntary Sujatha Rubbers vs. ITO (1992) 102 CTR (AP) 152 : (1992) 194 ITR 355 (AP), Laxman vs. CIT (1989) 75 CTR (Bom) 76 : (1988) 174 ITR 465 (Bom), A.N. Sarvaria vs. CWT (1985) 49 CTR (Del) 264 : (1986) 158 ITR 803 (Del), S.R. Jadav Desai vs. WTO Anr. (1980) 121 ITR 531 (Ker). (vi) There was time gap in furnishing details and agreeing to pay taxes as a well thought out decision had to be taken on whether to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larger Bench looking to the importance of the question. The issue has not been adjudicated upon to the knowledge of the appellant to date. Thus there is no finality to the issue as submitted by the Department. The case law relied upon by the Department vis (1989) 77 CTR (SC) 166 : (1990) 183 ITR 43 (SC) to submit otherwise thus looses significance. (iii) that although by inserting an explanation in s. 9(ii) of the IT Act, 1961, w.e.f. 1st April, 1979 by the Finance Act, 1983 [140 ITR (St) 116], it is clarified and declared that the income which falls under the head "salaries" payable for services rendered in India, shall be regarded as income earned in India, yet all kinds of payments arising under a contract of employment are not liable to tax in India. Despite the insertion of the Explanation, in the case of G. Winpenny vs. ITO (1994) 50 ITD 501 (Del) and in the case of N. Beaman vs. ITO (1995) 52 ITD 83 (Del), it is held (distinguishing the contra case laws on the subject some of which have been cited by the Department viz. John Patterson Co. (India) Ltd. vs. ITO Ors. (1959) 36 ITR 449 (Cal), ITO vs.S.A.Hareford (1985) 11 ITD 569 (Del), Performing Right Society Ltd. Anr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xus against the extra territorial argument. Since that was not the case vis-a-vis the appellant, its non-taxability made all the difference and took away the nexus because of which the House of Lords reversed the decision of the Court of Appeal. Thus the appellant continued to have a reasonable belief based on legal advice that the amounts paid outsideIndiawere not liable to tax inIndia. (v) Having acting on legal advice which was bona fide and which carried merit, it cannot be said that the appellant lacked reasonable cause in not deducting the tax at source, CWT vs. Ramnik Lal D. Mehta (1982) 28 CTR (Ori) 69 : (1982) 136 ITR 729 (Ori), Econ Furnances (P) Ltd. vs. Asstt. CIT (1996) 56 ITD 14 (Del)]. In the ultimate conclusion, for a reasonable cause to exist it is irrelevant whether the stand taken by the appellant is ultimately acceptable in its entirety to the Department. Even whether House of Lords reversed the decision of the Court of Appeal, they did so by a majority of 3 to 2. In other words, two learned law lords of the House of Lords uphold the decision of the Court of Appeal. The basis, therefore, cannot be said to be absurd or lacking reasonableness so as to deprive th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat Travancore Agency vs. CIT (1989) 77 CTR (SC) 74 : (1989) 177 ITR 455 (SC) and that conduct in the course of later proceedings is indicative of the existence or non-existence of the reasonable cause. The learned counsel submitted that as regards the establishment of mens rea the proposition is not disputed. However, the law only requires that a reasonable cause be shown by the assessee. When a reasonable cause is pleaded, the Department cannot remain silent spectator. Its adjudication and acceptance or rejection on cogent grounds is required to be made essentially CWT vs. Shri Jagadish Prasad Choudhary (1995) 125 CTR (Pat) (FB) 277 : (1995) 211 ITR 472 (Pat)(FB). 4.20. As regards the conduct and reasonable cause, the learned counsel further submitted that it was an effort to justify a basis which did not weigh with the lower authorities while levying and upholding the penalty. The lower authorities have not relied upon non-cooperation or alleged lack of volition to hold that there is no reasonable cause. The alleged lack of cooperation and volition by themselves have been held to constitute a ground for penalty. Moreover, this stand is incorrect inasmuch as existence of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1),New Delhi. The reply of8th May, 1995is also addressed to the Asstt. CIT, TDS Circle 22(1),New Delhi, whereas the returns were being filed with the TDS Officer, Circle 22(5),New Delhi. Thus TDS Officer, Circle 22(1), was obviously not aware of the affairs of the company at that stage and thus there was no question of any allegation at that stage, nor, detection or any confrontation with facts known to or established by the Department. The proceedings were being taken by a TDS Officer different than the TDS Officer before whom the various compliance were being made. The understanding of the appellant that details from Anpara only were being sought (letter of 28th March, 1995) is also clear from a letter issued directly by consultants of the appellant to the same officer dt.12th June, 1995, wherein vide para. 3 it was confirmed "the project office has not made any other payment to non-residents". There is thus no denial vide either reply of8th May, 1995, nor by the reply of the Chartered Accountants dt.12th June, 1995. Further, realising that the wording of the requisition dt.28th March, 1995, may be not upto the mark, a pin-pointed specific second letter was issued to Anpara Proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial which did not exist or was not within the knowledge of the authority which took the decision, and (b) That it is additional evidence not the basis of the penalty and not on record of the CIT(A). Despite categoric assertion in the course of hearing as to when the said letters have been translated into English, no reply is forthcoming from the Department, because, the fact of the matter is that the said letters have only now been translated and that too in a slipshod manner only to impute motive and unwarranted mala fide to the appellant. The contents of the letter are not what is purported to be (correct translation having been placed on record and again attached hereto as Annexure D) and their having only now in the course of proceedings before the Tribunal been translated, reliance thereupon cannot be made. (c) Without prejudice, the letters do not indicate any lack of bona fide or non-existence of reasonable cause. The correct translation supports the stand that at the time VDS was in vogue, its applicability to the assessee amongst others was itself being doubted. The objective was that if at all the view is to prevail it should only be for future avoiding penalty, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Department that volition, cooperation indicated existence of the reasonable cause is accepted to be correct, without prejudice then, even these factors are proven as a default is not made out under s. 201 or s. 221. Passing of an order, or taking action under s. 201 or s. 221 may not be, strictly speaking, a condition preceding to levy of penalty under s. 271C but, it certainly, beyond doubt, indicate that there was no lack of cooperation or absence of volition on the part of the appellant. If there was any non-cooperation/lack of volition vis-a-vis tax, action under s. 201 was imminent. No such action testifies cooperation and volition. (vi) Where an assessee is deemed to be in default, but, the action is not upheld by the appellate authorities, prosecution under s. 276B does not lie. This is because s. 201 which treats the assessee to be in default envisages a milder default of an assessee who "does not deduct tax" as required by the provisions of s. 192. On the other hand, s. 271C penalises a person "who fails to deduct" such tax. Default envisaged by s. 271C also uses identical terminology and stands on the same pedestal as prosecution. The dictum therefore that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial upon which the penalty order is passed has not been given to it. The documents found in the course of survey which has been relied upon to levy/uphold the penalty have at no stage been confronted to the appellant. Further, to substantiate that there is no lack of cooperation/volition copy of order-sheet for the proceedings before the TDS Officer 22(1) was sought. The inspection sought has been denied and it is on that account that the assessee went into a writ before the Hon ble Delhi High Court. Where rules of natural justice are violated in penalty proceedings the penalty order is bad in law and has to be quashed. Reliance was placed on 11 SCC 276; CIT vs. Eminent Enterprises (1992) 106 CTR (Ker) 44 : (1993) 201 ITR 766 (Kar), CIT vs. Rameshwar Das Ram Narain 1975 CTR (All) 135 : (1977) 107 ITR 710 (All). 4.22. The learned counsel argued further that a clue may be taken from provisions of s. 251 of the IT Act which empowers the CIT(A) to set aside the cases of assessment but in the case of penalty he can only quash or uphold the order. Since the subject-matter of appeal before the Tribunal is the correctness of the order of the CIT(A), natural justice having been violated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a part of the salaries for services rendered in India relating to its Anpara Project and liaison office in Japan to its expatriate employees and not deducted tax at source as per provisions of s. 192 of the Act. It is the case of the appellant that provisions of Chapter XVII-B relating to deduction of tax at source are not applicable to the salaries paid outsideIndiafor work/service rendered inIndia. This view is contrary to the statute. Sec. 9(1)(ii), Explanation, provides that income chargeable under the head salaries , if it is earned in India, shall be deemed to accrue or arise in India. This Explanation was inserted by the Finance Act, 1983, w.e.f.1st April, 1979, for removal of doubts. After the insertion of Explanation to s. 9(1)(ii) there could be no doubt or dispute in this regard. The need to insert the above Explanation arose because of judgment of the Hon ble Gujarat High Court in CIT vs. S.G. Pgnatale (1980) 16 CTR (Guj) 337 : (1980) 124 ITR 391 (Guj) wherein it was held that the amount received outside India as retention remuneration by employees of the French company which had entered into an agreement with an Indian company for rendering certain services in Europe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off period (when they were off the rigs and physically present outside India), which was paid outside India, the Tribunal analysed the contract of employment in detail and came to a finding of fact that the services continued not in India but abroad subject to the discretion of the head office of the appellant company whereas in the case of Grindlays Bank Employees it was a case of leave from official duty altogether. This is how the Tribunal distinguished the decision of Calcutta High Court in the case of Grindlays Bank on the basis of the terms of employment of the employees. 5.4. The other case reported in (1995) 52 ITD 83 was also concerned with foreign technicians employed by the same company for maintenance and operation of offshore rigs under a contract between the foreign company and the ONGC and the employees under their contract of employment were entitled to 28 days off for every 28 days of duty on rigs but they were liable to make themselves available to foreign company for training and services anywhere in the world during off period. The employees physically remained outsideIndiaduring off period and the salary for that period was paid outsideIndia. The Tribunal ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the learned counsel for the appellant initially referred to the decision of Court of Appeal in U.K. in the case of Oceanic Contractors Inc. (1982) Simons Tax Cases 66 wherein it was held that U.K. Parliament intended s. 204 of U.K. Act which dealt with payee scheme workable and, therefore, a foreign employer even if he were willing to deduct tax would find administrative difficulties in applying regulations and accordingly it may not have intended s. 204 to have worldwide operation. Accordingly the Court of Appeal opined that it should be restricted to its territorial operation inU.K.This was the case of employees working inNorth Seaoutside territorial waters ofU.K.but within the area designated in the convention on high seas in 1958. The appeal was concerned with the employees who were paid income and worked for oceanic of derrick barges, etc. and other vessels in both theU.K.and Norvegians sectors ofNorth Sea. It was held that the Continental Shelf Act, 1964, and Finance Act, 1973, contained a clear recognition of the fact that a designated area is not part ofU.K.and in particular s. 38(6) of Finance Act, 1973, does not deem it so for income-tax purposes. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required under s. 275 of the Act. The question, therefore, of the date on which the Asstt. CIT made reference to the Dy. CIT as contended by the appellant is totally irrelevant. In fact no reference was required. The statute itself being clear in this respect and no authority having been cited by the appellant, the plea that the penalty order is barred by limitation is misconceived and erroneous. 5.11. As regards the plea that penalty levied under s. 271C should have preceded by action under s. 201, the learned Departmental Representative argued that the mere fact that no order was passed under s. 201 will not in any manner affect the power of the Dy. CIT to initiate penalty proceedings for failure to deduct whole or any part of the tax as required by the provisions of Chapter XVII-B. The language of s. 271C is clear. Action under s. 271C is not dependent on any order which may or may not be passed under s. 201. The liability to deduct tax is absolute and the levy of penalty for failure to do so is also made absolute by the legislature in this section itself, subject to the right of the person concerned under s. 273B to prove that there was reasonable cause for its failure to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n before the CIT(A) at the stage of arguments and before the Tribunal is that the appellant was advised that provisions relating to tax deducted at source was not applicable in respect of salaries paid to expatriate employees abroad for services rendered inIndia. No material whatsoever has been produced in this respect except oral assertions and one certificate filed during proceedings for stay before the Tribunal. The said certificate filed before the Tribunal for the first time is dt.9th March, 1998, and it is signed by the Chief Representative of the company inIndia. There is no opinion filed of any legal counsel of the year 1989 or any later years before the question arose on an enquiry by the Asstt. CIT. The appellant has eminent counsel inIndiaas well as inJapanwho could not be unaware of the amendment made by the Finance Act, 1983, in s. 9(1)(ii).This plea is definitely an afterthought and ought to be rejected. 5.13. According to the learned Departmental Representative the plea of bona fide belief also needs to be examined. He submitted that Form No. 24 of annual return of salaries was admittedly filed every year and it was verified to be correct. There was no note appende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd. vs. Smt. Nirmala Devi Ors. (1979) 118 ITR 507 (SC) on which reliance is placed by the appellant. According to the learned Departmental Representative the Hon ble apex Court has clearly held that it is only if there are no laches on the part of the litigants and there is no taint of mala fide or any element of recklessness that a reasonable cause based on legal advice can be entertained. There is clearly lack of bona fide and an effort to conceal the facts. Reliance placed on the decision of the Hon ble Delhi High Court in Sequoia Construction Co. (P) Ltd. Ors. vs. P.P. Suri, ITO (1985)47 CTR (Del) 277 : (1986) 158 ITR 496 (SC) and Detecon Indian Project Office vs. ITO Ors. (1995) 123 CTR (Del) 416 : (1994) 210 ITR 260 (Del) is equally misplaced. 5.16. The learned Departmental Representative further submitted that efforts of the appellant to state that the officers of the Department had given any assurance for non-levy of penalty is totally misconceived and erroneous. No evidence has been placed on record in this respect. In fact that admission made before the CIT(A) is very clear. Further, despite notices and requisitions by the Asstt. CIT to place letters of appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offices in the same building inIndia one for Anpara project and the other for liaison office. The company has the same auditors, same legal counsel and it is inconceivable to comprehend that when details were being asked in respect of Anpara project of salaries being paid outsideIndiathe liaison office was not confronted or was not aware at all. Even to get details for liaison office notices were issued on12th Dec., 1995, and only thereafter on31st Jan.,1996, the details were given after taking time and no suo motu information was furnished. 5.19. As regards the contention of the appellant that subsequent events and acts cannot be taken into account while judging the existence of reasonable cause for non-deduction of tax at source, the learned Departmental Representative has pointed out that the only thing according to the appellant that should be considered is the alleged understanding of legal position by the appellant in 1989. Such proposition is wholly misconceived. Apart from the fact that no evidence of such legal opinion has been filed and the legal position was clear right from 1983 when Finance Act, 1983, added Explanation to s. 9(1)(ii), subsequent events and acts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l), (1985) 11 ITD 569 (Del), 1977 CTR (SC) 429 : (1977) 106 ITR 11 (SC), (1991) 94 CTR (Cal) 146 : (1992) 193 ITR 457 (Cal), (1991) 92 CTR (Cal) 227 : (1992) 193 ITR 439 (Cal) and (1992) 193 ITR 4 (Cal) (sic) that amounts received which were not for services rendered in India were not liable to tax in India. (iv) That the original belief that provisions of deduction of tax at source would have extra-territorial operations was duly supported by the decision of the Court of Appeal equivalent to our High Court (cited supra). The stand taken is that the amounts paid were not liable to tax inIndiainasmuch as it was not for services rendered inIndia. Thus, the appellant continued to have a reasonable belief based on legal advice that the amounts paid outsideIndiawere not liable to tax inIndia. Having acted on legal advice which was bona fide and which carried merit it could not be said that the appellant lacked reasonable cause in not deducting the tax at source. (v) That the acid test which support the appellant about the cooperation is that contemporaneously the appellant has not been found to be an assessee in default. If there was any non-cooperation the Department would have cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative are distinguishable and that the plea of existence of a reasonable cause was not an afterthought. (x) That the facts have been mischievously misconstrued by the Revenue so as to bring the assessee within default. It is too late in the day to submit that there is no reasonable cause as that was specifically pleaded before the lower authorities and not dealt with or improperly rejected. In fact the lower authorities did not think it proper to examine at length whether a reasonable cause existed. They merely went by the alleged conduct at a much later point of time to hold that penalty is leviable. The cause having been pleaded the onus thereafter shifted to the Revenue. The onus not having been discharged by the Revenue no penalty was exigible. Rather than analysing the cause pleaded it is now being submitted by the Department that no material is shown to exist in support. The existence of cause was never doubted. Criteria not relevant to the levy of penalty was invoked and when at the second appellate stage the approach was pointed out to be erroneous to hide their own error, lack of material is now being pleaded by the Revenue. The onus cast on the assessee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the events as borne out from the records are as under: 28th March, 1995: Asstt. CIT TDS Circle 22(1),New Delhiwrote to the general manager, Anpara project, treating him the principal officer of the company to furnish information among others on the following : (3) The details of all allowances, payments, reimbursements, perquisites made to your employees during the financial years, 1988-89 to 1993-94 employee-wise and year-wise whether treated as taxable or exempt? (4) The total amount received by each expatriates inIndiaduring financial years 1986-87 to1993-94. The letter issued was in terms of s. 133(6) and the compliance was fixed for14th April, 1995. 18th April,1995: S.R. Batliboi Co., Chartered Accountants sought extension for supply of the required details on behalf of the project office. 8th May, 1995: The project office gave information among others as under: "2. Mitsui is filing TDS returns as required by the IT Act, 1961. The returns are being filed under the jurisdiction of the ITO TDS 22(5),New Delhi. 3. The employees have been provided with some or all of the following payments, allowances and perquisites: (a) Basic salary Taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hartered Accountant informed the Asstt. CIT that the details required about payments made abroad to expatriates have been called from the head office inJapanand the same will be furnished as soon as received. It was also intimated that out of 16 summons issued to expatriates only three out of them were working at present inIndia. 31st Jan., 1996: Complete details were furnished as required. 9th Feb., 1996: The Asstt. CIT sought details of short deduction of tax. 21st/29th March, 1996: The company informed the Asstt. CIT that a sum of Rs. 10,38,94,465 comprising of short deducted tax of Rs. 7,17,07,935 and interest thereon of Rs. 3,28,66,701 for the financial years 1989-90 to 1995-96 has been paid. 7.4. As regards the liaison office the Asstt. CIT sought similar information vide his letter dt. 12th Dec., 1995, for the financial years 1986-87 to 1995-96 and in its reply dt, 21st Dec., 1995, the liaison office expressed its willingness to furnish the requisite details but sought time as the same was to be collected from head office in Japan. Finally the liaison office in its letter dt.12th March, 1996, furnished complete information about the payments made to its expatriates a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the tax together with the amount of simple interest thereon referred to in sub-s. (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-s. (1). 206(1) : The prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the foregoing provisions of this Chapter shall, within the prescribed time after the end of each financial year, prepare and deliver or cause to be delivered to the prescribed IT authority, such returns in such form and verified in such manner and setting forth such particulars as may be prescribed. 221(1) : When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-s. (2) of s. 220, be liable, by way of penalty, to pay such amount as the AO may direct, and in the case of a continuing default, such further amount or amounts as the AO may, from time to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TRO; to realise the tax amount. Arrest of the person responsible by the TRO. 8.2. Failure to deduct tax at source also attract penalty under s. 221 of the IT Act unless the assessee proves to the satisfaction of the AO that the default was for good and sufficient reasons. Besides, penalty under s. 271C is also leviable for such default if the assessee fails to prove that there was reasonable cause for the default for non-deduction of tax at source within the meaning of s. 273B of the IT Act. The person responsible is also liable to pay interest for the delayed payment of tax as per provisions of s. 201(1A) of the IT Act. 8.3. One of the main grounds taken by the Revenue for levy of penalty is that the assessee-company did not cooperate in furnishing information about the salary paid to expatriate employees in Japan and the short tax deducted was paid as a result of investigation and efforts made by the concerned Asstt. CIT. The conduct of the assessee in this respect would be borne out from the following facts: (a) That the general managers of project office and liaison office had been filing the annual returns with Asstt. CIT, TDS Circle 22(5),New Delhi. However, the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed to the Dy. CIT in response to the show-cause notice issued under s. 271C that the company during the process of supplying the requisite information and details of the payment of short tax deduction and interest thereon was given assurance by the officers of the CBDT and the Ministry of Finance, Department of Revenue, that no penalty proceedings would be launched on its payment. A copy of this letter is endorsed to the Chairman, CBDT, and the Chief CIT,New Delhi. The assurance given by the Department of the type mentioned might have prompted the assessee-company to make the payment of amount of short deducted tax and interest on such amount for delayed payment but that does not weaken the claim of the assessee-company that if fully cooperated for supply of requisite information about the salary paid in Japan to its expatriate employees and the amount of tax deductible therefrom and payment thereof in Government account along with interest thereon but rather in strengthens its claim. 8.4. Considering the above facts and sequence of events we see no merit in the arguments of the Revenue that the assessee-company did not extend necessary cooperation during investigation and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt inJapanin their letter dt.8th May, 1995, and12th June, 1995, but looking to the pinpointed query subsequently made by the Asstt. CIT in his letter dt.8th Aug., 1995, it appears that the query made in the Department s letter dt.28th March, 1995, was not pinpointed or specific about the payment made by Mitsui Co. inJapanto the expatriates deputed toIndiaand it is for this reason that the Asstt. CIT sought requisite information in the letter written subsequently on8th Aug., 1995. Moreover, neither Mitsui Co. as such nor the expatriates involved denied payment abroad and the information earlier given was in the context of Anpara Project and not head office of the company in Japan. It is, therefore, evident from the queries made and the reply given that the said denial made was under misunderstanding of the intended purpose of the enquiry. There otherwise appears no mala fide denial particularly when the assessee-company had fully cooperated and complied to enquiry made and ultimate payment of amount of short tax deduction from the salary paid to expatriates inJapan. Moreover, such denial cannot be the basis for levy of penalty under s. 271C and it is totally irrelevant insofar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., 1997, and completed the proceedings on31st July, 1997. As per s. 275, penalty proceedings were required to be completed within six months from the end of the month in which such proceedings were initiated. 8.9. We note that provisions of s. 271C are different from the provisions of s. 271(1)(c) where penalty proceedings have to be initiated during the course of assessment proceedings. Under s. 271C, the proceedings are to be initiated by the Dy. CIT and order is to be passed within six months from the end of the month in which the proceedings were initiated by the Dy. CIT. The Dy. CIT initiated the penalty proceedings vide show-cause notice dt.6th Jan., 1997, and penalty orders were passed on31st July, 1997. The orders passed were, therefore, within the period of six months from the end of the month in which penalty proceedings were initiated. The penalty orders passed are, therefore, valid and legal and the challenge made in this behalf is misconceived. 8.10. We accordingly see no infirmity in the order of the Dy. CIT on this count. 8.11. The learned counsel of the assessee-company has also challenged the validity of the penalty levied on account of the violation of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court finally disposed of the petition of the assessee-company in its order dt.23rd Nov., 1998, in C.W. No. 4024/98 observing as under: "The grievance raised in this petition is very limited. Penalty proceedings under s. 271C of the IT Act, 1961 were initiated and finalised by the Dy. CIT, Range-23, New Delhi, against the petitioner resulting into a penalty of Rs. 6,99,82,700 being imposed on the petitioner by order dt.31st July, 1997. The penalty order is subject-matter of appeal before the Tribunal. The petitioner sought for inspection of the records so as to defend himself. The inspection is not being allowed to the petitioner as the same is being resisted by the Department. This petition has been filed during the pendency of the appeal before the Tribunal by the petitioner/assessee submitting that even before the Tribunal, the petitioner would not be in a position to defend itself and argue the appeal effectively unless the inspection is allowed. Today it is stated at the Bar that the hearing before the Tribunal is concluded, but the petitioner has made a request to the Tribunal to await the decision of this Court in this petition before deciding the appeal. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impounded from the assessee-company and the same read as under: Confidential 25th July, 1994 Re : Income-tax in India/New tax measures With reference to the mentioned above according to Newspaper all corporates including foreign companies should file tax return properly by 31st July has been announced by tax authority. And regarding this internal notice within tax authority has been delivered to all foreign banks which are operating inIndia. Regarding this issue on the 8th of July JCCI inDelhihas held emergent committee but since they could not understand the applicability of this letter and hence they decided to just keep a watch and not to do anything for the present. But after the committee since the Bank of Tokyo and Sakura Bank have expressed their opinion that they wanted to revise their returns according to the intention from tax authority. Therefore, we have had committee again on 19th of July. At the above both the banks decided to revise their return but it was reported to be impossible to finalise all procedures to revise their return in time. We thought above actions might include all Japanese companies to revise their return. Mitusi may also have to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r countries in which Mitsui operate." 8.16. It so appears from the aforecited circulars that the group of Japanese companies had meeting on the question of deduction of tax at source from the salary paid to expatriate employees in Japan in light of the Board s circulars urging payment to TDS amount together with interest thereon before 31st July, 1994, so as to avoid penalty and prosecution. These circulars in our view are in no way incriminating insofar as the penalty proceedings under s. 271C were concerned. It rather shows their seriousness to break with the past and to comply with the Indian tax laws relating to TDS. 8.17. We have also noted above that the assessee-company in its reply submitted to the Asstt. CIT in penalty proceedings made a reference to the discussions at the level of Board where the assessee claimed to have been assured against levy of penalty and prosecution of payment of amount of short tax deduction and interest thereon and copies of these letters written have been endorsed to the Chairman, CBDT, and Chief CIT,New Delhi. This indicates that there was certain discussion at the highest level before the payment of the amount of short tax deduction and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r after giving an opportunity of being heard to the assessee. The Tribunal set aside the order of the AAC and deleted the penalty levied holding that while exercising powers under s. 251(1)(b) of the Act, the AAC had no power to remit the issue to the AO as in appeal against an order imposing a penalty the AAC could confirm or cancel such order or vary it so as either to enhance or to reduce the penalty. The finding given by the Tribunal was confirmed by the Hon ble High Court. 8.21. In the present case it is evident from the facts discussed that though specific request was made, the Dy. CIT did not supply the copy of the statement of the general manager recorded during survey, documents impounded and inspection of the penalty records and even on the intervention of the Hon ble High Court and by the Tribunal the Revenue though has supplied copies of the impounded documents and the statement recorded of the general manager but inspection of the penalty records has not been allowed. Since these documents are materially relevant to the levy/non-levy of penalty, denial of their copies/inspection has obviously violated the principles of natural justice and accordingly, the penalty lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (1983) 32 CTR (Cal) 61 : (1983) 142 ITR 468 (Cal). 8.26. From the language of s. 271(1)(a) it is clear that the authorities determining the question of imposing the penalty has to precisely address itself to the question whether the delay in filing the return has been or has not been without reasonable cause and in determining this question, all relevant facts appearing on the record of the case shall have to be taken into consideration CIT vs. Mangat Ram Hazarimal Kuthiala (1980) 14 CTR (P H) 80 : (1980) 125 ITR 91 (P H). 8.27. The question whether or not the assessee failed without reasonable cause to furnish return within the time allowed is primarily and essentially a question of fact to be decided in each case on a consideration of all the relevant circumstances Shiv Shankarlal vs. CGT (1974) 94 ITR 269 (Del). 8.28. Bona fide belief of the assessee that his income has below taxable limit was held to be reasonable cause and the mere fact that the assessee agreed to a settlement does not necessarily militate against the bona fide belief Rajendra Nath vs. CIT (1992) 106 CTR (All) 355 : (1992) 188 ITR 653 (All). 8.29. We have already noted that expatriate employees had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any investigation about the salary, if any, paid to them in Japan nor the question of subjecting the salary paid to them in Japan was considered and decided on merits for taxation in India in their individual cases and the position being so the general managers acting as disbursing officers in both offices neither had details about the salary paid to each of the expatriate employees in Japan nor aware about its taxability in India and their responsibility for deduction of tax as per provisions of Chapter XVII-B. There is no material available on record to prove the facts otherwise. The general managers were, therefore, under the bona fide belief that the salary and perquisites paid to expatriate employees inIndiaas per the terms of their deputation, only were taxable inIndiaand tax thereon was to be deducted as per provisions of Chapter XVII-B. There is no material brought on record by the Revenue to establish and prove that the general managers were in the knowledge about details of payments made in Japan to expatriate employees and their taxability in India and in the absence of any such material there was a good and sufficient reason available for not deducting the tax at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider while levying such penalty is existence or reasonable cause for non-deduction of tax at source and the reasonable cause as shown by the assessee-company has not been properly appreciated and deliberated by the lower authorities. 8.33. We shall now discuss whether there existed such reasonable cause at the relevant time. The following facts are material to the issue under consideration: (a) The learned counsel for the assessee-company has invited our attention to a decision of December, 1982 in the case of Oceanic Contractors Inc.. In this case Oceanic Contractors Inc. a non-resident overseas company, engaged in pipe laying and platform construction in theNorth Seaemployed about 400 workers on its barges and other vessels. The company carried on its operation in various locations throughout the world some of which were in theU.K.sector of theNorth seaand were designated area under the Continental Shelf Act, 1994. The company also maintained establishment inU.K.and deducted payee tax in respect of employees employed at those establishments. However, employees who were employed in theU.K.sector of theNorth Seawere paid in US dollars free ofUnited Kingdomtax by cheques sent by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the request was denied. When approached the CIT took the view that having regard to s. 9(1)(vii) and s. 195 of IT Act the payment constituted income which deemed to accrue or arise in India and was liable to deduction of tax at source and accordingly he declined to intervene. The writ petition filed by the assessee-company was rejected by the Andhra Pradesh High Court. The Hon ble Supreme Court noted that the Revenue seemed to be proceeding on the basis that the foreign company was liable to tax and that, therefore, the assessee-company was obliged to deduct at source the tax payable by the foreign company. The services were rendered by the foreign company in the nature of training abroad to personnel belonging to the assessee-company and the payment to the foreign company was also effected abroad. The Hon ble Supreme Court going into the relevant Constitutional provisions considering the question involved of great public importance referred the case involved to the Constitutional Bench with the following observations: "But the question is whether a nexus with something inIndiais necessary. It seems to us that, unless such nexus exists, Parliament will have no competence to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ourTokyooffice. But as a result of subsequent clarification like Amnesty circulars issued by CBDT in mid 1994 and part of 1995 (Circular Nos. 685 696) as well as discussion with various tax authorities our company changed its stance and decided to harmonise with the above and Indian income-tax law. We thus calculated the taxes for 6 years from 1989-90 to 1994-95 and deposited the same along with interest." The legal opinion tendered by the internal legal cell of the assessee-company in the backdrop of the aforesaid decisions assumes credibility and the same cannot be brushed aside simply for the reason that it is not supported by any independent evidence especially when such legal advice was given by the internal legal cell of Tokyo office of the company and which was not tendered by any outside experts. (d) On going through the copies of said circulars seized from the project office on survey by the Asstt. CIT, as extracted above, we find that when the Government of India came out with the scheme for foreign company to pay the short deduction amount from salary paid to its expatriate employees including that paid in foreign country to avoid penalty and prosecution, various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short tax deduction. The assessee-company also compensated the Revenue by way of paying interest for such late payment as required under s. 201(1A). There, was thus no occasion for the Revenue to levy penalty under s. 221 for non-payment of tax due after it was deemed to be in default. 8.36. It is pointed out here that s. 271C brought on the statute w.e.f.1st April, 1989. Prior to its insertion there existed s. 276B which read as under : "Failure to pay the tax deducted at source. If a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine." 8.37. Thus, prosecution was provided for such default prior to1st April, 1989, in addition to the charge of interest under s. 201(1A) and penalty under s. 221. After insertion of s. 271C failure to deduct and pay is not prosecutable but liable to penalty though the language of erstwhile s. 276B and present s. 271C is pari materia. Under both the sections the person to be prosecuted or the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
