DCIT, CIRCLE - 57, KOLKATA, KOLKATA vs. M/S. HEIGHT INSURANCE SERVICES LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM] I.T.A No.1939/Kol/2010 Assessment Year: 2009-10 Deputy Commissioner of Income-tax, Vs. M/s. Height Insurance Services Ltd. Circle-57, Kolkata. (PAN: AACCH0943G) (Appellant) (Respondent) Date of hearing: 14.09.2015 Date of pronouncement: 05.10.2015 For the Appellant: Dr. Adhir Kumar Bar, CIT, DR For the Respondent: Shri R. N. Bajoria, Sr. Advocate ORDER Per Shri Mahavir Singh, JM: This appeal by revenue is arising out of order of CIT(A)-1, Kolkata in Appeal No608/CIT(A)-1/Range-57/09-10 dated 30.07.2010. Assessment was framed by DCIT, Cir-57, Kolkata u/s 201(1)/201(1A) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2009-10 vide its order dated 12.11.2009. Penalty was imposed by Addl.CIT (TDS), Range-57, Kolkata u/s. 271C of the Act vide his order dated 01.02.2010. 2. The only issue in this appeal of revenue is against the order of CIT(A) deleting the penalty levied by Addl.CIT(TDS) u/s. 271C of the Act for failure/short deduction of TDS u/s194-D of the Act as against deducted by assessee u/s 194-C of the Act. For this, revenue has raised following two grounds: “1. On the facts and circumstances of the case Ld. CIT(A) was not justified in deleting the penalty of Rs.8,80,89,883/- imposed u/s. 271C though the deductor could not deny the fact it failed to deduct tax and deposit to Govt. account. 2. On the facts and circumstances of the case Ld. CIT(a) was not justified in deleting the penalty imposed u/s. 271C though the Apex Court has clear verdict in the judgment in the case of Union of India Vs. Dharmendra Textiles Processors (2008) 306 ITR 277 (SC) that willful concealment is not an essential ingredient for attracting civil liability.”

2 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 assessee in order to carry out work entered into agreement with Global Trust Financial Services (in short GTFS) and as per terms of agreement GTFS finds prospective customers through its net work on behalf of assessee and those customers will in turn purchase insurance policy from RLICL. During FY 2008-09, assessee paid an amount of Rs.94,41,57,368/- and the bifurcation of this payment is Rs.59,11,97,368/- as operating expenses and Rs.35,29,60,000/- as service charges. The assessee deducted TDS on total payment @ 2% considering the nature of payments as contractual payments under the provisions of section 194C of the Act. The AO during survey noticed that the payments are in the nature of insurance commission and for the purpose of TDS the same falls under the provisions of section 194D of the Act thereby assessee is liable to deduct TDS @ 20%. Accordingly, the AO issued show cause notice post survey and thereby computed differential/short deduction of TDS at Rs.10,69,73,029/- and interest chargeable u/s. 201(1A) of the Act at Rs.78,21,509/-, thereby the AO made assessment u/s. 201(1) and 201(1A) of the Act. This assessment was accepted by assessee and no appeal was filed against quantum addition. However, the AO initiated penalty proceedings u/s. 271C of the Act for short deduction of TDS u/s. 194D of the Act on insurance commission. Before Addl. CIT (TDS) the assessee contended that as per written agreement between the assessee and GTFS dated 01.08.2008 these are contractual payments because the assessee is acting as a pure agent of GTFS. After that, in term of contractual payments, the assessee deducted TDS @ 2% under the provisions of section 194C of the Act and assessee does not fall under the provisions of section 194D of the Act being insurance agent. According to Ld. Counsel, the payments are not in the nature of insurance commission rather these are contractual receipts but the AO i.e. Addl. CIT (TDS) has not accepted the explanation of the assessee and levied penalty for short deduction of tax to the tune of Rs.8,80,89,883/-. Aggrieved, assessee preferred appeal before CIT(A).

3 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 charges paid to GTFS due to bona fide views. Aggrieved, now revenue is in second appeal before Tribunal. 5. We have heard rival submissions and gone through facts and circumstances of the case. Before us, Ld. Counsel for the assessee Shri R. N. Bajoria, Sr. Advocate, first of all, drew out attention to the agreement entered into between assessee and GTFS dated 01.08.2008 wherein assessee disclosed it as an agency company and pure agent is the GTFS and life insurance company is Reliance Life Insurance Co. Ltd. Ld. Counsel for the assessee drew our attention to page 2 of the agreement wherein the agency company i.e. the assessee agreed to appoint GTFS as pure agent for the following purposes. The relevant purposes are mentioned in the agreement, which reads as under: “(i)Procurement of prospect for insurance business on account of the Agency Company by utilizing the services of the Network. (ii) Payment of incentive / other expenses/ service charges / to the Network on behalf of the Agency Company for the prospect of insurance business procured by the Network on account of the Agency Company. (iii) Authorising the Golden Trust Financial Services to make payment to the Network for the prospect of insurance business procured by the Network on behalf of the Agency Company.” Ld. Counsel for the assessee also drew our attention to Article-1 of the agreement wherein the infrastructure and obligation of various parties are mentioned. The infrastructure and obligation reads as under: “ARTICLE 1 : THE INFRASTRUCTURE : 1.1. The Infrastructure of Golden Trust Financial Services is in a position to provide necessary assistance to the Company to enable it to carry on the Agency Business. 1.2. Golden Trust Financial Services agrees to provide the Infrastructure to the Agency Company and the Agency Company agrees to obtain the Infrastructure during the Term so as to enable the Agency Company to carry on Agency Business with the assistance of the Infrastructure of Golden Trust Financial Services. 1.3. Such provisions of Infrastructure by Golden Trust Financial Services to the Agency Company shall not be exclusive and Golden Trust Financial Services shall be at liberty to provide the Infrastructure also to other business enterprises and/or carry on its own business at or through the Infrastructure. ARTICLE 2: OBLIGATIONS OF GOLDEN TRUST FINANCIAL SERVICES 2.1. Golden Trust Financial Services, in its capacity as Pure Agent of the Agency Company shall assist the Agency Company in obtaining and/or procuring prospect for insurance business through the utilization of the services of the Network.

4 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 2.2. Golden Trust Financial Services shall, in its capacity as Pure Agent of the Agency Company make payment of the incentive/other expenses/service charge due to the Network from the Agency Company for the prospect for insurance business obtained and/or procured by the Network for the Agency Company. 2.3. Golden Trust Financial Services shall provide to the Agency Company basic infrastructure i.e. office premises, employees, computers, equipments, air conditioners, furniture & fixture and all office stationeries. 2.4. Golden Trust Financial Services shall through the utilization of its infrastructure assist Agency Company to process all data as may be required by the Agency Company, enter into all correspondence with the customers, take all steps which are required to be taken by the Agency Company in processing the claim and do all other acts, deeds and things as may be required by the Agency Company for carrying on the Agency Business. 2.5. Golden Trust Financial Services shall also with its infrastructure assist the Agency Company in receiving and/or collecting premiums, issuing receipts thereof, as and when required. 2.6. Golden Trust Financial Services shall permit the Directors executives and the employees, if any, of the Agency Company to use and/or operate its computers and other office equipments. 2.7. Golden Trust Financial Services shall assist the Agency Company in all possible manners so as to enable the Agency Company to carry on the Agency Business. ARTICLE 3: OBLIGATIONS OF THE HEIGHT INSURANCE SERVICES LTD 3.1. The Agency Company shall from time to time provide the following to Golden Trust Financial Services so as to enable Golden Trust Financial Services to perform its obligations under this Agreement: (a) Provide adequate quantity of all necessary forms of stationery, publicity materials, brochures, proposal forms, claim forms etc. to enable it to distribute the same to the Network according to its requirements. (b) Provide the terms and conditions of various policies available with Reliance Life Insurance Co Ltd. Rate Tables and/or Charts, Customer Data, Claim Records etc. to supply the same to the Network as and when needed. 3.2. The Agency Company shall communicate to Golden Trust Financial Services the amount of incentive/other expenses/services charges to be paid to the Network for procuring the prospect for insurance business. 3.3. The Agency Company shall also discharge its other obligations as provided in this agreement.” 6. Further, Ld. Counsel for the assessee stated that the assessee has to reimburse the expenses of GTFS in its capacity as pure agent of the Agency Company on account of payment of incentives, other expenses and service charges etc. According to Ld. Counsel, GTFS shall be reimbursed for the incentive and other expenses paid by it to the network as pure agent of the Agency Company for procuring prospectus of the insurance business by the network on behalf of the Agency Company. Similarly, Ld. Counsel by passing reference drew our attention to payment of remunerations also of

5 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 Rs. 2 cr. to GTFS from August, 2008 to Marc, 2009. Even for making available necessary services of infrastructure, the assessee was under obligation to make payment to GTFS amounting to Rs.2 cr. from the Agency company for the same period. In term of the above, Ld. Counsel for the assessee stated that there is no element of insurance commission to be received or to be paid rather this is only contractual obligation between assessee and the Agency Company. When this was pointed out to the Ld. Counsel for the assessee by the Bench that how this is to be treated as contractual obligation and not insurance commission, Ld. Counsel for the assessee stated that an expert’s opinion was taken qua this proposition by the assessee and one Advocate Shri Chandan Dutta delivered his opinion dated 05.11.2008 wherein after considering the agreement entered into between the assessee and GTFS, he opined that GTFS was appointed to carry out certain work on behalf of the assessee in pursuance of a contract and accordingly, the payments by assessee to GTFS for carrying out the aforesaid work falls within the ambit of contractual obligation and consequently, TDS is to be deducted u/s. 194C of the Act i.e. payments to contractors. Ld. Counsel for the assessee in view of the above opinion referred to the case law of Hon’ble Gujarat High court in the case of ITO Vs. Sachinam Trust (2010) 320 ITR 445 (Guj) wherein the Tax Audit Manual published by Bombay Chartered Accountants Society, contained the opinion of eminent counsel that in the case of a person carrying on banking business, the appropriate expression to be considered for deciding the applicability of the provisions of section 44AB of the Act would be on the term “gross receipts” and on the basis of this opinion, Hon’ble Gujarat High Court deleted the penalty by treating the same as reasonable cause by observing as under: “In the circumstances, without entering into the analysis of the provisions of section 44AB of the Act, for the purpose of determining whether in the case of money-lender, turnover would constitute the basis for invoking the said provision or gross receipts would constitute the basis for applying the said provision, the appeal is decided on the ground as to whether the assessee had a bona fide belief which constituted reasonable cause in the facts and circumstances of the case. Under the provisions of section 273B of the Act, the Legislature has provided that notwithstanding anything contained in the provisions of section 271B of the Act, no penalty shall be imposable on a person or an assessee for any failure referred to in the said provisions if it is proved that there was reasonable cause for the said failure.”

6 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 225 (SC) that the penalty u/s. 271C of the Act is not automatic and reasonable cause will waive the penalty in case the assessee is able to prove the same. Hon’ble Supreme Court has discussed the scope of section 271C read with section 273B of the Act and held that in case the assessee is in a genuine and bona fide belief that it was not under obligation to deduct tax penalty u/s. 271C of the Act cannot levied and for this, Ld. Counsel for the assessee referred to para 36 at page 251 of the report, which reads as under: “(iv) On the scope of section 271C read with section 273B: Section 271C, 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 XVII-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. In these cases we are concerned with section 271C(1)(a). Thus, section 271C(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 hold this provision to be mandatory or compensatory or automatic because under section 273B Parliament has enacted that penalty shall not be imposed in cases falling there under. Section 271C falls in the category of such cases. Section 273B states that notwithstanding anything contained in section 271C, no penalty shall be imposed on the person or the 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 liability to levy of penalty can be fastened only on persons 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 on the person to prove such good and sufficient reason. In each of the 104 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 deduction of tax at source under section 192 was a nascent issue. It has not been considered by this court before. Further, in most of these cases, the tax deductor-assessee has not claimed deduction under section 40(a)(iii) in computation of its business income. This is one more reason for not imposing penalty under section 271C 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 lakhs (see Civil Appeal No. 1778 of 2006 entitled CIT v. Bank of Tokyo-Mitsubishi Ltd.). In some of the cases, it is undisputed that each of the expatriate employees have paid directly the taxes due on the foreign salary by way of advance tax/self-assessment tax. The tax-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/head office and, consequently, we are of the view that in none of the 104 cases penalty was leviable under section 271C as the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source." 8. Ld. Sr. Dr, however, relied on the decision of Hon’ble Kerala High Court in the case of CIT Vs. Mr. Thomas Muthoot, ITA No. 139 of 2013( arising out of order in ITA No. 385/Coch/2011 of I.T.A. Tribunal , Cochin Bench dated 11.01.2013) dated 03.07.2015 and stated that merely good and sufficient reasons asked by the assessee cannot be the basis for deletion of penalty and it cannot be a plea that the assessee firm

7 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 has returned loss and not liable to pay any tax in view of the decision of Hindustan Coca Cola Beverage (P) Ltd. Vs. CIT (2007) 293 ITR 226 (SC). When a query was put to ld. Sr. DR that there is no reasonable cause argued in the case of Mr. Thomas Muthoot, supra of Hon’ble Kerala High court but only issue was whether merely the other party has included the receipts in their income and paid taxes, will absolve the assessee from the rigors of provision of section 194C or sec. 194D of the Act i.e. the TDS provisions. The Ld. Sr. DR could not reply on this. He also relied on the decision of Hon’ble Supreme Court in the case of Mak Data P. Ltd. Vs. CIT (2013) 358 ITR 593 (SC) and also Union of India & Ors. Vs. Dharmendra Textiles Processors & Ors. (2008) 306 ITR 277 (SC), wherein willful concealment is not an essential ingredient for attracting civil liability. Ld. Sr. DR was again asked whether the decisions of Dharmendra Textiles Processor, supra and Mak Data P. Ltd., supra have been diluted in the case of T. Ashok Pai Vs. CIT (2007) 292 ITR 11 (SC). Ld. Sr. DR also stated that the opinion of the Advocate was not available before the AO at the time of assessment of tax. On this, Ld. Counsel for the assessee stated that the entire agreement was referred to by the AO during penalty proceedings and the clauses of the agreement are verbatim reproduced in the same. Now question arises, whether the short deduction of TDS u/s. 194D of the Act treating the payments as contractual receipts u/s. 194C of the Act, in the given facts and circumstances as above, attracts penalty u/s. 271C of the Act or not. The facts above narrated are undisputed. The assessee has made payments treating the same as contractual payments in lieu of the agreement after obtaining opinion from the advocate. There is no dispute that the assessee has deducted tax u/s. 194C of the Act for contractual payment on the basis of the opinion of advocate and this is also not under dispute that the deductions were required to be made by the assessee u/s. 194D of the Act from the payments being made by the assessee either reimbursement of expenses or payments being contractual or commission income. Once there is advice from an expert, assessee has to rely on it and this constitutes a reasonable cause. Hon’ble Delhi High Court in the case of Woodward Governor India P. Ltd. Vs. CIT (2002) 253 ITR 745 (Del) has dealt with the issue of reasonable cause as mentioned in section 273B of the Act as under: “Levy of penalty under section 271C is not automatic. Before levying penalty, the concerned officer is required to find out that even if there was any failure referred to in

8 ITA No.1939/K/2010 M/s. Height Insurance Services Ltd. AY 2009-10 the concerned provision the same was without a reasonable cause. The initial burden is on the assessed to show that there existed reasonable cause which was the reason for the failure referred to in the concerned provision. Thereafter the officer dealing with the matter has to consider whether the Explanation offered by the assessee or the person, as the case may be, as regards the reason for failure, was on account of reasonable cause. "Reasonable cause" as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow." The advice of the expert i.e. advocate after going through the clauses of the agreement holding the same as contractual obligation may be ill conceived advice but assessee has no option except to believe the same. Accordingly, in view of facts and circumstances of the case, we are of the view that the CIT(A) has rightly deleted the penalty and we confirm the same. Appeal of revenue is dismissed. 9. In the result, the appeal of revenue is dismissed. 10. Order is pronounced in the open court on 05.10.2015 Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member Dated : 05th October, 2015 Jd. Sr. P.S Copy of the order forwarded to: 1. APPELLANT – DCIT, Circle-57, Kolkata. 2 Respondent – M/s. Height Insurance Services Ltd., 55, Jatin Das Road, Kolkata-700 029. 3. The CIT(A), Kolkata 4. CIT Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.