ITAT Deletes Penalty For Default In Not Deducting TDS On Foreign Remittances

The Jaipur Bench of Income Tax Appellate Tribunal (ITAT) has deleted the penalty levied for default in not deducting TDS on foreign remittances.

The bench of Sandeep Gosain (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) has observed that the assessee has deliberately not avoided TDS and there is no contumacious conduct on the part of the assessee.

The ITO has passed an order under Section 143(3) of the Income Tax Act, 1961. During scrutiny proceedings, it was found that in the profit and loss account, the assessee company has debited an amount under the heading 'Software License and Set-up Charges' which was credited to M/s BJW Consulting Service LLC and Practice Forces- Anesthesia Billing Software.

As per Section 195(1) of the Income Tax Act, 1961, “any person responsible for paying to a non-resident, not being a company, or to a foreign company any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a check or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.”

However, the assessee company has not made TDS at the time of payment or credit. Therefore, the AO disallowed the amount.

The matter went on appeal, and finally, the Income Tax Appellate Tribunal held that the payment made by the assessee would fall under the definition of royalty as defined under u/s. 9(1)(vi) as well as under Article 13(2) of the Indo-US DTAA. As the assessee was considered to have defaulted in payment of TDS notice u/s. 271C of the Act, it was issued to the assessee on March 22, 2018. Considering the reply of the assessee, the AO did not convince and hold that the assessee is a defaulter in not deducting TDS and liable for penalty under § 271C. For this failure, the Addl. CIT (TDS) passed an order levying a penalty of Rs. 11,46,838 against the assessee.

The assessee contended that the assessee was bona fide and had not deducted TDS. The penalty has been levied after 4 years, and therefore, the levy penalty is beyond the permitted time line. The AO in the assessment proceeding considered the explanation of the assessee and has not initiated the penalty proceeding. The payer has no PE and no agency agreement, so the sum paid is not chargeable to tax in India.

The department contended that the assessee admitted that they had not deducted TDS under bona fide, and the law does not permit the waiver of levy or penalty under bona fide.

The tribunal noted that the levy of penalty is not correct as the assessee has reasonable cause for such failure and the revenue has already disregarded and disallowed the claim of the assessee on account of non-deduction of tax.

The ITAT held that the levy of penalty was deleted on the ground that there was bona fide and reasonable cause in not deducting TDS.

Counsel For Appellant: G. M. Mehta

Counsel For Respondent: Monisha Choudhary

Case Title: Isys Softech Pvt. Ltd. Versus ITO

Case No.: ITA No. 528/JP/2023

Click Here To Read The Order