Facts of the Case

Denso India Limited, engaged in manufacturing operations in India, had expatriate technicians deputed by its parent company in Japan. These employees were paid part salary in India and part outside India by the foreign entity.

A survey conducted by the Income Tax Department revealed that tax had not been deducted at source on the foreign salary component paid in Japan. The Department alleged violation of Section 192 and initiated proceedings for penalty under Section 271C.

The Assessing Officer imposed penalty amounting to ₹5.74 crores for failure to deduct tax at source. The assessee challenged the penalty before the Commissioner of Income Tax (Appeals), who deleted the penalty holding that reasonable cause existed.

Subsequently, the CIT(A) invoked Section 154 and reversed his earlier order, restoring the penalty. The assessee challenged this rectification before the ITAT, which held that the CIT(A) had exceeded jurisdiction by reviewing his own order under the guise of rectification. The Revenue challenged the ITAT’s order before the Delhi High Court.

Issues Involved

  1. Whether the Commissioner of Income Tax (Appeals) could invoke Section 154 to alter the substantive findings of an earlier appellate order?
  2. Whether rectification under Section 154 can be used as a tool for review?
  3. Whether penalty under Section 271C is leviable where the assessee establishes reasonable cause for failure to deduct TDS?
  4. Whether earlier Supreme Court findings on the same issue bind subsequent proceedings?

Petitioner’s Arguments (Revenue Department)

  • The Revenue argued that the earlier appellate order suffered from factual mistakes apparent from the record.
  • It was contended that the CIT(A) was justified in invoking Section 154 to correct those mistakes.
  • The Department submitted that the assessee had failed to deduct tax under Section 192 on salary paid abroad, making it liable for penalty under Section 271C.
  • It was argued that the rectification proceedings were independent and validly exercised.

Respondent’s Arguments (Assessee)

  • The assessee contended that Section 154 permits only rectification of apparent mistakes and not review of findings already reached.
  • It argued that the CIT(A) effectively reviewed his earlier decision, which was beyond statutory jurisdiction.
  • The assessee maintained that there existed bona fide belief and reasonable cause regarding non-deduction of TDS on foreign salary.
  • It relied on prior judicial precedents where similar penalties were deleted.

Court Findings / Observations

The Delhi High Court observed that:

  • Section 154 cannot be used as a substitute for review powers.
  • The CIT(A) had no authority to reconsider the merits of the earlier order under rectification jurisdiction.
  • The Revenue had already pursued appellate remedies against the original order.
  • The Supreme Court in Commissioner of Income Tax v. Eli Lilly & Co. (India) Pvt. Ltd. had already examined similar issues and held that no penalty under Section 271C could be levied where reasonable cause existed.
  • The Supreme Court had specifically held that in cases involving expatriate salary structures and evolving legal interpretations, non-deduction was based on bona fide understanding.

Court Order / Final Decision

The Delhi High Court dismissed the Revenue’s appeals and declined to answer the framed question of law, holding that any decision contrary to the Supreme Court’s findings would be impermissible.

The Court upheld the ITAT’s decision and confirmed that penalty under Section 271C was not sustainable in the present case.

Important Clarification

This judgment clarifies that:

  • Section 154 is limited to rectification of apparent mistakes and cannot be used for substantive review.
  • Penalty under Section 271C is not automatic.
  • Section 273B provides statutory protection where reasonable cause is proved.
  • Once the Supreme Court settles an issue on merits, lower courts cannot reopen the same issue indirectly.

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 – No penalty if reasonable cause is established 

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

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