Facts of the Case

Denso India Limited, engaged in manufacturing operations in India, had expatriate technicians deputed from its Japanese parent company for services in India. These expatriate employees were paid salary partly in India and partly outside India by the parent entity.

During a departmental survey, it was found that the company had not deducted TDS under Section 192 on the salary component paid outside India.

The Department alleged default in deduction of TDS amounting to ₹5.74 crore for multiple assessment years.

A penalty proceeding under Section 271C was initiated.

The Assessing Officer imposed penalty on the ground that the assessee had failed to deduct TDS.

The CIT(A), by order dated 29 January 2003, deleted the penalty after holding that there existed “reasonable cause”.

Subsequently, the CIT(A), by invoking Section 154, revisited the same issue and restored the penalty.

The ITAT set aside the rectification order, holding that Section 154 cannot be used as a review mechanism.

Revenue challenged the ITAT order before the Delhi High Court.

Issues Involved

1. Whether Section 154 permits review of an earlier appellate order?

Whether CIT(A) can reopen and alter its concluded findings under the guise of rectification.

2. Whether penalty under Section 271C was justified for non-deduction of TDS on expatriate salaries paid abroad?

Whether the assessee had reasonable cause for such failure.

3. Whether rectification can alter the substantive basis of the original order?

Whether Section 154 extends to reconsideration of facts and merits.

Petitioner’s Arguments (Revenue Department)

The Revenue argued:

  • The original appellate order contained factual mistakes.
  • Important facts were allegedly overlooked.
  • Section 154 empowered correction of mistakes apparent from record.
  • The rectification order was validly passed.
  • The assessee deliberately failed to deduct TDS on overseas salary payments.
  • Penalty under Section 271C was rightly leviable.

Revenue contended that the original order suffered from factual omissions requiring correction.

Respondent’s Arguments (Denso India Limited)

The assessee argued:

  • Section 154 permits only rectification and not review.
  • CIT(A) exceeded jurisdiction by reversing its own concluded findings.
  • There existed bona fide belief regarding taxability of overseas salary.
  • Tax and interest had already been voluntarily deposited.
  • Similar matters had been decided in favour of assessees in earlier judgments.
  • Reasonable cause existed under Section 273B.

The assessee maintained that penalty under Section 271C could not survive.

Court Findings / Observations

The Delhi High Court held:

1. Section 154 cannot be used as a review provision

Rectification is confined only to apparent mistakes.

It cannot be used for reappreciation of evidence or changing conclusions.

2. CIT(A) exceeded jurisdiction

The rectification order substantially altered the earlier decision.

This amounted to review, which is impermissible.

3. Supreme Court had already settled the penalty issue

The Supreme Court in CIT v. Eli Lilly & Co. (India) Pvt. Ltd. had already held that no penalty under Section 271C was leviable where reasonable cause existed.

That ruling covered the assessee’s case as well.

4. Parallel litigation by Revenue was procedurally improper

The Court criticized the Department for pursuing multiple proceedings without proper disclosure.

5. Reasonable cause was established

The issue of expatriate salary taxation was a developing legal issue.

Hence penalty could not be sustained.

Court Order / Final Decision

The Delhi High Court:

 Dismissed the Revenue’s appeals
 Upheld the ITAT’s decision
 Refused to answer the framed question of law
 Held that the Supreme Court’s findings on merits governed the issue
 Confirmed that penalty under Section 271C was not leviable

Important Clarifications

Rectification vs Review

Section 154 is limited to correction of obvious mistakes.

It does not permit fresh evaluation of facts. 

Sections Involved

  • Section 154 – Rectification of mistake apparent from record
  • Section 192 – Deduction of tax at source from salary
  • Section 201(1) & 201(1A) – Consequences of failure to deduct/pay TDS
  • Section 260A – Appeal to High Court
  • Section 271C – Penalty for failure to deduct tax at source
  • Section 273B – Reasonable cause exemption from penalty 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:4992-DB/SMD31082017ITA3712005.pdf

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