CIT V. JAPAN AIRLINES INTERNATIONAL CO LTD

ITA/302/2011

AI Insights

The case involves multiple appeals concerning the levy of penalties under Section 271(c) of the Income Tax Act for various assessment years against a company incorporated in Japan, which operated aircraft in international traffic and employed expatriates in India. The core issue was the company's failure to deduct tax at source on certain components of salaries paid to expatriate employees, specifically amounts related to social security and insurance pensions paid in Japan. Although the company deducted and deposited tax for salaries paid in India and Japan, it did not initially deduct tax for these specific components in India, leading to penalty proceedings. The penalties were contested but were ultimately deleted by the CIT (A) and upheld by the ITAT, referencing the fluid legal interpretation of the tax deduction obligations at the time.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 687934 (HC-INDIA)
• Appeal Type: Others
• Pronouncement Date: 15-07-2011
• Assessment Year: misc
• Other Referred Cases: CIT Vs. Eli Lilly & Co. (India) (P) Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Expatriate Employees; Insurance pension; Penalty; Social Security; Tax at source; Tax Deduction
• Section: 192; 271(c); 40(a)(iii); 273F; 277C

Judgement Text

"a\"- (v LZto L9# o/o T5.OV \"2(}3.L Present: Mr. Abhishek Revenue. +tTA 296120L1, wA 29? l}@rL ITA 298/20nX lTA 30L/201n trA302/20L3. rTA 303/201L lT'A 30rS/2(}1X tTA 305/20n1 (common orders) In all these appeals which per.tain to the same assessee, the issue pertains to the levy of penalty under Section 27I (C) of the Income Tax Act (hereinafter referred to as 'the Act') for different assessment years. The factual background is that the assessee is a .company incorporated in Japan and is engaged in the operation of aircrafts in international traffic. Some expatriate employees of this company had served in India from 1't April, 2007. A survey was conducted by the income tax authorities on the,premises of the assessee on 24tn February, 2005 wherein it was noticed that the assessee had failed to deduct tax on the part of amount paid by the assessee to the said expatriate employees. We may note here itself that on the salaries paid to the5e expatriates in India as well as in Japan, tax at source was duly deducted by the assessee and deposited.with the income tax authorities. However, the assessee had not deducted the tax at source. One component part that is the Maratha,- Sr. Standing Counsel for the Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified |r:. amount pa'id to these expatiiates in Japan towards social security, l insurante pension etc. lt was also found that though tax at source was not deducted on the aforesaid component in lndia, but tax was duly deducted in Japan and paid to the income tax authorities in Japan. According to the income tax department, the aforesaid component also form part of salaries within the meaning of lndian Income-Tax Act and, therefore, the assessee was required to deduct tax at source thereupon as well. lt is further a matter of record that after this objection was raised, the assessee, deposited the tax on that amount as well. However, failure on the part of assessee in not deducting the tax at source at the time of disbursement of salary led to initiation of penalty proceeding under Section 27I (c) of the Act and ultimately the Assessing Officer passed orders under the aforesaid provisions levying different amounts as penalties for the assessment year 1999-2000 to 2005=06. These penalties were deleted by the CIT (A) and the order of the CIT (A) has been confirmed by the ITAT. A perusal of the order of the Tribunal would demonstrate thait the concept of application of entire income charged under the head \"salary\" was a nascent issue at the relevant tim.e. Law on this aspect was in fluid situation and there was no clear cut autlrority/ pronouncements on this aspect.\"This is observed by the Apex Court itself in CIT Vs. Eli Lilly & Co. (lndia) (P) Ltd. 3r2 lrR 225. In rhat case also, on Supreme Court Section 27I (c) Court discussing identical circumstances, in this very ground, the upheld the deletion of penalty imposed under of Act. The relevant observations of the Supreme this aspect is as follows:- \"(iv) On the Scope of Section 27lC read with Section 273F: Section 277C inter alia states that if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVll-B then. such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct. ln these cases we are concerned with Section 27IC(1)(a). Thus Section 27IC(1)(a) makes it clear that the penalty leviable shall be equal to the amount of tax which such person failed to deduct. We cannot hol'd this provision to be mandatory or compensatory or automatic because under Section 2738 Parliament has enacted that penalty shall not be imposed in cases falling thereunder, Section ZTIC falls in the category of such cases. Section 2738 states that notwithstanding anything contained in Section 27IC, no penalty shall be imposed on the person or tlre assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the t liability to levy .of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax. The burden, of course, is bn the person to prove such good and sufficient reason. In each of the IO4 cases before us, we find that non- deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head \"Salaries\" being exigible to Qeduction of tax at source under Sectiori I92 was a nascent issue. lt has not be considered by this Court before. Further, in most of these cases, the tax- deductor-assessee has not clainred deduction under Section a0(a)(iii) in computation of its business income. This is one more reason for not imposing penalty under Section 277C because by not claiming deduction under Section 40(a)(iii), in some cases, higher corporate tax has been paid to the extent of Rs. 906.52 lacs (see Civil Airpeal No. ITTBIOG entitled CIT v. The Banl< of Tokyo-Mitsubishi Ltd.). ln some of the cases, it is undisputed that each of the expatriate employees have paid directly the tdxes due on the foreign salary by way of advance taxiself-assessment tax. The ta><- deductor-assessee was under a genuine and bona fide belief that it was not under any - obligation to deduct tax at source from the home salary paid by the foreign company/HO and, consequently, we are of the view that in none of the 104 cases penalty was leviable under Section 27IC as the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source.\" The Tribunal has followed the aforesaid judgment and rightly so has observed that above 'facts of the present case are identical to the facts in the aforesaid judgment. In these circumstances, 'we. are. of the opinion that no substantial question of law arises in these appeals and the same are ,dismissed accordi ngly. M.[-.MEFilTA, J, July L5, 20L1 skb "