Facts of the Case

The assessee, Denso India Limited, engaged in manufacturing operations in India, had expatriate technicians deputed by its Japanese parent company for work at its Greater Noida manufacturing unit. These employees were paid salary partly in India and partly outside India in Japan.

A survey conducted by the Income Tax Department revealed that the salary component paid in Japan had not been subjected to TDS under Section 192. The Department alleged non-compliance and initiated proceedings.

The assessee subsequently revised its tax computation and deposited tax along with interest under Section 201(1A), asserting that the omission was based on a bona fide understanding that salary paid outside India was not taxable in India.

The Assessing Officer imposed penalty under Section 271C for failure to deduct TDS. The CIT(A) initially deleted the penalty, accepting the assessee’s explanation of “reasonable cause.” However, later exercising powers under Section 154, the CIT(A) reversed its own order and restored the penalty. This rectification order was challenged before the ITAT.

Issues Involved

  1. Whether the Commissioner of Income Tax (Appeals) could invoke Section 154 to effectively review and reverse its own earlier appellate order?
  2. Whether non-deduction of TDS on salary paid abroad to expatriate employees attracted penalty under Section 271C?
  3. Whether the assessee had established “reasonable cause” under Section 273B to avoid penalty?

Petitioner’s Arguments (Revenue Department)

  • The Revenue argued that the assessee failed to deduct TDS on substantial salary payments made outside India to expatriates, violating Section 192.
  • It contended that the CIT(A) was justified in rectifying mistakes under Section 154 because the earlier order overlooked material facts.
  • According to the Department, the omission by the assessee was deliberate and therefore attracted penalty under Section 271C.
  • The Department emphasized that rectification was permissible as the earlier order contained apparent factual and legal mistakes.

Respondent’s Arguments (Assessee – Denso India Ltd.)

  • The assessee argued that there was no intention to evade tax and the non-deduction arose from a genuine and bona fide belief regarding taxability of overseas salary.
  • It submitted that tax and interest had already been voluntarily paid after discussions with tax authorities.
  • It contended that Section 154 permits only correction of apparent mistakes and does not permit review or reconsideration of an earlier concluded order.
  • The assessee relied on judicial precedents where similar penalty proceedings were quashed due to reasonable cause.

Court Findings / Observations

The Delhi High Court held that the subsequent developments in connected litigation had attained finality up to the Supreme Court, where it was conclusively held that the assessee had established reasonable cause for non-deduction of tax.

The Court observed that the Supreme Court in CIT v. Eli Lilly & Co. (India) Pvt. Ltd. had already settled the issue by holding that no penalty under Section 271C was leviable where the issue was nascent and involved genuine interpretational controversy.

The Court further observed that once the original order deleting penalty stood affirmed by the ITAT, the High Court, and the Supreme Court, entertaining the present appeals would create inconsistency with the Supreme Court’s findings.

The Court declined to answer the framed question of law in view of the binding effect of the Supreme Court judgment.

Court Order / Final Decision

The Delhi High Court dismissed the Revenue’s appeals and declined to interfere.

It held that in view of the Supreme Court’s final adjudication on merits affirming the assessee’s reasonable cause for failure to deduct TDS, no penalty under Section 271C could survive.

Thus, the appeals were dismissed without costs.

Important Clarification

1. Section 154 Cannot Be Used as a Review Mechanism

Rectification powers are limited to correcting mistakes apparent from record and cannot be used for reconsideration or review of concluded findings.

2. Penalty under Section 271C Is Not Automatic

Penalty is not mandatory merely because there is TDS default. If reasonable cause exists, Section 273B protects the assessee.

3. Bona Fide Interpretation Protects Against Penalty

Where taxability itself was debatable and the assessee acted in good faith, penalty cannot be imposed.

4. Supreme Court Findings Override Parallel Proceedings

Once the Supreme Court conclusively decides the merits, parallel or connected proceedings cannot result in contradictory outcomes.

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 TDS
  • Section 271C – Penalty for Failure to Deduct Tax at Source
  • Section 273B – Reasonable Cause Exception

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

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