ITO, FARIDABAD vs. M/S MITSUBISHI HEAVY INDUSTRIES LTD., FARIDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘E’: NEW DELHI BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA No. 2915/Del/2011 Assessment Year: 2009-10 Income Tax Officer, Vs. Mitsubishi Heavy Industries Ltd., TDS Ward, Faridabad 12/4, Mathura Road, Faridabad (PAN: AAACM1432F) (Appellant) (Respondent) Appellant by : Sh. P. DAM Kanunjna, Sr. DR Respondent by : Sh. Deepak Chopra & Ms. Ananya Kapoor, Advocates Date of hearing: 08.10.2015 Date of pronouncement: 30.10.2015 ORDER PER INTURI RAMA RAO, A.M.: This appeal filed by the Revenue is directed against the order of ld. CIT(A), dated 14.03.2011 passed for the assessment year 2009-10. The Revenue raised the following grounds of appeal: i. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in facts and law in deleting the penalty as Tax Deductor continued deducting the tax, but failed to deposit the same into the Central Govt. account within the stipulated time. ii. On the facts and in the circumstances of the case, the finding of Ld. CIT(A) deleting the penalty on the ground that the tax Deductor was ignorant of Indian Tax Laws is not correct as it took the Tax Deductor more than one year to understand and comply with the Indian Tax Laws. iii. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of the appeal. 2. The brief facts of the case are as follows:

2 1.1 Mitsubishi Heavy Industries, Ltd ("MHI" or "Appellant") is a foreign company incorporated under the laws of Japan. Earlier in 2007, MHI had entered 'into a License and Technical Assistance Agreement with Larsen & Toubro Limited, India ("L&T") for grant of license and transfer of know-how and technical -information to L&T for engineering, manufacturing, selling and marketing of supercritical boilers and steam turbine generators and related parts. Subsequently, MHI entered into Joint Venture agreements with L&T for engaging in business of design, engineering, manufacture, selling and distribution of supercritical boilers and supercritical steam generators. For this purpose, MHI and L&T have made investments in 2 joint venture companies in India viz. - L&T -MHI Boilers Private Limited; and -L&T-MHI Turbine Generators Private Limited 1.2 During the previous year 2008-09, the respondent assessee company had deputed certain employees to the joint venture company in India, to work under the control and supervision of Indian JV companies. The payroll of such expatriates was processed partly in India and partly in Japan. The local companies have done tax withholding on the salaries paid in India and paid the same to the credit of tax authorities. The respondent assessee company being a corporate registered under the laws of Japan was in the process of ascertaining the taxability of salary being paid to the deputed personnel and the modalities to discharge the liability of payment of taxes on salary and other requirements in India. 1.3 At the outset, it is submitted that under the scheme of employment, all the employees deputed to India were covered under the tax equalization policy of the respondent assessee company. As per the said tax equalization policy, the employer is required to bear the tax liability arising out of the employment in India. The tax borne by the employer is grossed up and was included as part of the salary for the period the services were rendered by the employee in India. Thus, in case of the respondent assessee company, the entire tax liability in the hands of the employees in India on account of salary payment was borne by the respondent assessee company, which was calculated only at the time of deposit of taxes. Hence effectively, no deduction was made from the salary paid to the employees in Japan at the time of payment of salary to the credit of employees account. 1.4 The respondent assessee company was deciding the manner in which the compliances need to be undertaken including the entity which shall undertake the withholding tax compliances i.e. respondent assessee company vis-a-vis the joint venture companies.

1.5 After establishing the liability, the respondent assessee company filed an application for Tax Deduction Account Number (TAN) on March 18, 2009 as the same was required for depositing the taxes with the Indian Government Treasury and to file the quarterly tax deducted at source (TDS) returns. In absence of any branch or office or Bank Account in India, the respondent assessee company also had to evaluate and identify an appropriate mechanism to remit the amount towards the tax to be deposited in India. After completing all the required formalities, the respondent assessee company suo motu deposited the taxes on June 5, 2009 for financial year 2008-09 along with applicable interest under section 201(1A) of the Act aggregating to Rs. 2,23,65,425 (including interest under section 201(IA) of Rs 14,90,655). 1.6 Subsequent to the payment of taxes, the Ld. AO initiated proceedings under section 201(IA) by issuing a notice dated April 13, 2010 (which was received by the respondent assessee company on August 2, 2010) and penalty proceedings under section 221(1) of the Act for levy of penalty for payment of taxes of Rs 2,08,74,773 not being in accordance with the provisions of the Act. 1.7 The respondent assessee company received the impugned notice on 16 July 2010 requiring the respondent assessee company to show cause as to why penalty may not be imposed under section 221(1) for non- payment of amount of tax of Rs 2,06,74,773 in accordance with the provisions of the Act. The respondent assessee company had, however, deposited all taxes on 05 June 2009 i.e. even before the impugned notice had been received by it. Further, the respondent assessee company had suo-motto deposited amount of interest due by it, as per the provision 201(1A) of the Act even before the receipt of the impugned notice. 1.8 The penalty proceedings were concluded and an order under section 221 of the Act was passed by the Ld. AO raising a demand for penalty of Rs.25,00,000. Being aggrieved, an appeal was filed before the learned CIT(A), who vide order dated 14th March, 2011 deleted the penalty vide paras 6 & 6.1 of his order, which read as under:

4 “6. I have considered the submissions of learned counsel for the appellant and gone through the documents and evidences placed on record as well as the judicial rulings relied upon by the learned counsel. The facts, as emanating from the written submissions of the appellant, are that the appellant had deputed certain employees to its two joint venture companies with L&T group in India to work under the control and supervision of Indian JV companies,. Under the scheme of employment, all the employees deputed to India were covered under the tax equalization policy of the appellant in which the employer is required to bear the tax liability arising out of the employment in India. The tax borne by the employer was grossed up and included as part of the salary for the period the services rendered by the employees in India. The payrolls of such expatriates were processed partly in India and partly in Japan, The appellant, being a corporate entity registered under the laws of Japan, was in the process of ascertaining the taxability of salary being paid to the deputed personnel and the modalities to discharge the liability for payment of taxes on salary to such expatriate employees. The entire tax liability in the hands of the employees in India on account of salary payment was borne by the appellant, which was calculated at the time of deposit of taxes. Hence, no deduction of tax was made from the salary paid to the employees in Japan at the time of payment/ credit to employees' account. Admittedly, this leads to the inference that the appellant was in default in non deduction of tax at source at the time of making payment of salary in Japan to its employees expatriated to India. The appellant has admitted that only after ascertaining its 'liability to deduct and pay the TDS, an application for Tax Deduction Account Number (TAN) was filed on l8.03.1999. The learned counsel has contended that since the expatriates were covered under a tax equalization policy, the appellant was of the view that there was no requirement to deduct any tax on the salary payments made outside India to such expatriates. Accordingly, the appellant should not be considered as assessee in default on the ground that the appellant has failed to deduct the tax at source. However, such contentions are contrary to the submissions wherein it has been stated that 'upon recognizing the mistake that the appellant was required to make tax payments in the nature of withholding of tax on employees' salaries on its own under the tax equalization policy, it had suo- motto made such tax payments along with interest'. 6.1. There is no dispute to the fact that the tax actually required to be deducted, has been deducted and paid to the Govt. account alongwith due interest. But there was certainly delay in depositing the TDS. It has been contended that appellant had no mala fide intentions as to non- compliance of Indian tax laws. All the taxes have suo-motto been paid by appellant even before the issue of notice u/s 221(1) by the AO and therefore, appellant should not be considered as assessee in default on the ground

5 that the appellant has failed to pay the taxes. However, explanation to section 221(1) provides that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax. The explanation to section 221 provides that penalty may be imposed even if assessee makes payment of tax before the levy of penalty. However, second proviso to section 221 (1) of the Act states that where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section. The proviso to section 201(1) also lays down that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax. Thus, the levy of penalty under section 221 (1) is subject to the satisfaction of the AO and reasonable cause for non compliance. The learned counsel has relied upon the decision of Hon'ble Supreme Court in the case of Hindustan Steel Ltd. vs. State of Oris sa (83 ITR 26), wherein the Hon'ble Apex Court has held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. However, recently, it has been held by the Hon'ble Supreme Court in the case of Amit Mohan Bindal (317 ITR 1) that the penalty (in the context of section 271(1)(c)) is a civil liability albeit a strict liability. Irrespective of tfe fact whether the tax was deducted at source at the time of making payment of salary to the employees and paid beyond prescribed time limits or not deducted at the time of payment of salary but deducted and paid late, there remains no dispute that the appellant was in default in terms of the provisions of section 201(1) of the Act. The only aspect that is to be seen is whether there was good, sufficient or bonafide reasons for not making compliance to the provisions of law. There is no doubt that the issue of deduction of tax at source from the salary of non residents expatriated to India has been debatable issue in as much as whether the tax was required to be deducted by their employer abroad while making payment in their country or by their joint venture partners in India. In the context of provisions of section 192 read with section 9 of the Act vis-a-vis the deduction of tax at source, the Hon 'ble Apex court in the case of CIT vs. Eli Lilly and Co. (312 ITR 225) has held that this was the first instance' that such an issue was examined by the Court. The Hon'ble Court also went ahead in holding that where the tax deductor was under a genuine and bonafide belief that it was not under an obligation to withhold taxes, there was no question of imposition of penalty as the assessees had been able to discharge the burden of showing reasonable cause for non deduction of taxes. The Hon'ble Court held that only those persons will be liable to

6 penalty who do not have good and sufficient reason for not deducting the tax. Accordingly, the penalty proceedings under Section 271 C were quashed on the ground that the assessee was under a genuine belief not to deduct taxes and therefore, there was a reasonable cause for not imposing penalty. It has been held that for these reasons, no penalty proceedings under section 271 C shall be taken in any of these cases as the issue involved was a nascent issue. The Hon’ble Apex Court has also held that the Indian Joint Venture partners were under obligation to deduct tax at source in respect of salary paid by their employer as such salary income was taxable in India by virtue of the provisions of section 9 of the Act, for having rendered services in India. The case of appellant is that the salary has paid by their parent employer in Japan in their home country but the services by the expatriate employees were rendered in India by virtue of the joint venture arrangement with L&T Group. It is for these reasons of uncertainty and difficulties involved in several cases that the Hon'ble Supreme Court has quashed penalty proceedings u/s 271C initiated for default of non deduction of tax at source by the Indian joint venture partners. The Hon'ble Court has specifically restricted the action only to the charging of interest for non compliance to the provisions relating to the TDS. In para 38 of the order is reproduced below: "38. For the reasons mentioned hereinabove, however, no penalty proceedings under section 271 C shall be taken in any of these cases as the issue involved was a nascent issue. Accordingly we quash the penalty proceedings under section 271C." When penalty u/s 271C has not been held to be leviable in these facts and circumstances of several cases (104 appeals) involved in the case of Elli Lilly & Co. (India) Pvt. Ltd., the default of nonpayment of TDS is subsequent to the default of non deduction. The AO has mentioned in the order that the appellant meticulously deducted tax at source from salary payments to its employees but there in nothing in the order to support such finding of fact. The fact that the amount of tax against each month is mentioned does no alone lead to the conclusion that the tax was actually deducted. This is a case where no deduction of tax was made at the time of payment of salary to expatriate employees but at the time of depositing amount of entire TDS which was almost immediately after the decision of Hon 'ble Apex Court in the case of Eli Li1ly Co. (India) Pvt. Ltd. (supra) delivered on 25.03.2009. I find that there was just, sufficient and reasonable cause before the appellant in not making compliance to the provisions of TDS as the issue of deduction of tax involved complexities and uncertainty. Therefore, the order passed by the AO in these facts and circumstances of appellant's case leving penalty of Rs.25,00,000/- is not sustainable in view of the decision of Hon'ble Supreme Court in the case of Eli Lilly & Co. (India) Pvt. Ltd. (supra). I have gone through the other decisions relied upon by the learned counsel, which more or less support

7 the case of appellant. Hence, the penalty order passed by the AO is cancelled. 2. From the perusal of the above, we do not find any reason to interfere with the order of the CIT(A). The order was passed in the light of the Hon’ble Supreme Court decision in the case of Amit Mohan Bindal (317 ITR 1). It is not the case of the Revenue that the tax has been deducted but not paid to the credit of the company. Hence, we uphold the order of ld. CIT(A) and dismiss the appeal filed by the Revenue. 4. In the result, the appeal filed by the Revenue is dismissed. The decision is pronounced in the open court on 30th October, 2015.

Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30th October, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi