Case Law Details

Case Name : M/s. Ushodaya Enterprises Vs. DCIT (TDS) (ITAT Hyderabad)
Appeal Number : ITA Nos. 546 & 547/Hyd/2017
Date of Judgement/Order : 29/11/2017
Related Assessment Year : 2008- 09
Courts : All ITAT (5168) ITAT Hyderabad (305)

M/s. Ushodaya Enterprises Vs. DCIT (TDS) (ITAT Hyderabad)

We find that the requirement to make the payment and the genuineness of the payment of non-compete fee by the assessee to Shri Ramoji Rao (HUF) has been adjudicated by the Tribunal in the assessee’s own case for A.Y 2008-09 and the contention of the assessee that the non-compete fee is the business expenditure of the assessee has been upheld. The assessee has always contended that it is its business expenditure and therefore, it was required to deduct the tax at source u/s 194J of the Act. For failure to deduct the tax inspite of being liable to do so, the penalty u/s 271 C is clearly leviable.

Full Text of the ITAT Order is as follows:-

Both are assessee’s appeals for the A.Y 2008-09. In ITA No. 546/Hyd/2017, the assessee is challenging the order of the CIT (A) in confirming the interest levied by the AO u/s 201(1A) of the I.T. Act, while in ITA No. 547/Hyd/2017, the assessee is challenging the order of the CIT (A) in confirming the penalty levied by the AO u/s 271C of the Act.

2. Brief facts of the case are that the assessee company entered into a non-compete agreement for a period of five years with Ramoji Rao (HUF) on 30.01.2008 for a total consideration of Rs. 670 crores. The AO noticed from the order of the ITAT dated 22.10.2014 in the assessee’s own case for the A.Y 2008-09, that the assessee has executed the non-compete agreement for a period of 5 years. On verification of Form No.26AS of Shri Ramoji Rao (HUF) for the A.Y 2007-08, the AO noticed that no TDS was deducted on the non-compete fee of Rs. 670 crores paid by the assessee to Shri Ramoji Rao (HUF). By virtue of the above deficiency noticed, the AO observed that the assessee company was liable for proceedings u/s 201 & 201(1A) of the I.T. Act. Therefore, a show-cause notice dated 15.12.2014 was issued to the assessee as to why the assessee should not be treated as “an assessee in default” and levied the interest u/s 201(1A) of the Act. Vide letter dated 19.12.2014, the assessee filed written submissions along with the copies of the non-compete agreement dated 30.01.2008, the return of income filed by Shri Ramoji Rao (HUF), the assessment order for the A.Y 2008-09 passed u/s 143(3) dated 24.12.2010 by the AO and the ledger extract of Ramoji Rao (HUF) in the books of M/s. Ushodaya Enterprises Pvt. Ltd for the financial year 2007-08. From the above documents, the AO observed that the amount of non-compete fee of Rs. 670 crores was paid to Shri Ramoji Rao (HUF) on 28.02.2008 by crediting his account in the books of M/s. Ushodaya Enterprises Pvt. Ltd as verified by the ledger folio filed by the assessee company. In the said letter, the assessee also took the objection that the action of the DCIT in issuing the notice dated 15.12.2014 for treating the assessee as “an assessee in default” is time barred. According to the assessee, under sub-section (3) of section 201 of the I.T. Act, the assessee cannot be treated as an assessee in default after the expiry of four years from the end of the financial year in which the payment is made. He submitted that this period was increased to six years by the Finance Act of 2009 w.e.f. 1.4.2010 and the Finance Act of 2014 has increased the period to seven years w.e.f. 1.4.20 14. Therefore, according to the assessee, the action taken by the AO is time barred and the assessee cannot be treated as “an assessee in default” nor can the interest be levied u/s 201(1A) of the Act. The AO however, observed that the time limit prescribed by the amended provisions of section 201(3) are only procedural and therefore, are applicable retrospectively. The AO also observed that u/s 28(va) of the I.T. Act, the payment of non-compete fee was chargeable to tax and the assessee ought to have made TDS u/s 194J of the Act. The AO accordingly held that the assessee is a defaulter u/s 201(1) of the Act. Thereafter, the AO observed that the payee is Ramoji Rao (HUF) paid tax on the receipt of non-compete fee and therefore, as per the judgment of the Hon’ble Supreme Court in the case of Hindustan Coco Cola Beverages Ltd (reported in 2007) 293 ITR 0226, the assessee cannot be treated as a defaulter for the purpose of section 20 1(1) of the I.T. Act. The AO, thereafter, proceeded to consider whether interest is chargeable u/s 201(1 A) of the Act. He observed that the nature of the interest charged u/s 201 (1A) is clearly compensatory in nature and therefore, has to be charged from the date of deductibility to the date of payment of tax by the payee. Accordingly, he computed and charged the interest at Rs.6,07,28,800. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us.

3. The assessee has filed the original grounds of appeal which are as under:

“1. The Order of the Commissioner of Income Tax (Appeals)-8, Hyderabad dated 06-03-2017 is erroneous, contrary to law and facts of the case.

2. Commissioner Income Tax (Appeals)-8 grossly erred in holding that the contention of the Appellant that the time limit of 4 years for completion of proceedings u/s. 201 (1) and 201 (1A) of the Act is required to be counted from the date of occurrence of default is not based on interpretation of statute. Commissioner of Income Tax (Appeals)-8 ought to have seen that no time limit was provided in the Act for completion of proceedings u/s.201 (1) & 201 (1A) at the relevant time when the alleged default had occurred. It is only later that a provision was introduced in Sec.201 providing time limit for completion of proceedings u/s.201 (1) & 201 (1A) and even such period had expired in Appellant’s case by the time proceedings were initiated u/s.201 (1) & 201 (1A). Hence Commissioner of Income Tax (Appeals)-8 is not justified in holding that interest levied u/s.201 (1A) is within the time limit.

3. Commissioner of Income Tax (Appeals)-8 is not justified in holding that the Appellant is not prevented by a reasonable cause in complying with the provisions of Sec. 1 94J(d) in not deducting tax from non-compete fee. Commissioner of Income Tax (Appeals)-8 ought to have seen that the recipient of non-compete fee did not have taxable income even after considering non-compete fee as income and therefore Appellant was requested by the recipient of Non-compete fee not to deduct tax from non-compete fee which is a reasonable Hence Commissioner of Income Tax (Appeals)-8 is not justified in holding that the Appellant did not prove that there was reasonable cause for not deducting tax at source in respect of non-compete fee.

4. Commissioner of Income Tax (Appeals)-8 ought to have seen that interest u/s.201 (1A) is leviable for the period from 07-02-2008 (date on which tax was deductible on non-compete fee) to 30-09-2008 (date of furnishing return of income). In fact the return of income of Sri Ramoji Rao (HUF) was e-fiIed on 30-09-2008 itself and it is only a hard copy of return that was filed before the Assessing Officer on 1310-2008. Hence Commissioner of Income Tax (Appeals)-8 is not justified in holding that interest is leviable upto 13-10-2008. Further the Commissioner of Income Tax (Appeals)-8 ought to have seen that due date for deducting tax from non-compete fee credited on 30-01-2008 is 07-02-2008. Hence Appellant submits that Commissioner of Income Tax (Appeals)-8 is not justified in holding that interest is leviable for the period 30-01-2008 to 13-10-2008. Further Appellant submits that such direction amounts to enhancement of interest leviable u/s.201 (1A) without giving notice to the Appellant and is therefore not

5. For all of the above and such other grounds as may be urged at the time of hearing it is most respectfully prayed that this Hon’ble Tribunal may be pleased to allow the appeal by cancelling Order passed u/s.201 (1A) and sustained/enhanced by the Commissioner of Income Tax (Appeals)-8 in the interest of justice”.

4. As a substitute to the above, the concise grounds of appeal were filed by the assessee. But the learned DR submitted that the concise grounds of appeal are enlarging the original grounds of appeal and are not arising out of the CIT (A)’s order. The learned Counsel for the assessee, then submitted that the assessee does not wish to press the concise grounds of appeal. Therefore, the original grounds of appeal filed by the assessee only are considered and adjudicated as under:-

5. Ground No. 1 is general in nature and needs no

6. As regards ground of appeal No. 2, we find that it is on the question of time limit for initiation of proceedings u/s 201(1) of the Act. We find that sub-section (3) of section 201 of the Act provided for the time limit for deeming a person to be “an assessee in default” for failure to deduct the whole or any part of the tax from a person resident in India. Prior to 1.4.20 10, the time limit prescribed u/s 201(3) was 4 years from the end of the financial year in which the payment is made or credit is given. By the Finance Act of 2012, it was amended with retrospective effect from 1.4.2010 increasing the period to 6 years from the end of the financial year in which the payment is made or credit is given and a proviso thereto provided that such order for a financial year commencing on or before 1st of April, 2007 may be passed at any time on or before 31.3.2011. Thus, while amending the provisions of section 201(3) by the Finance Act 2012, the Legislature, in its wisdom, has sought to retain the period of 4 years for an order u/s 201(1) of the Act to be passed for a financial year commencing on or before 1st day of April, 2007 as the period of 4 years therefrom would end on 31.3.2011. Financial year before us is 2007-08 i.e. commencing on 1.4.2007 relevant to the A.Y 2008- 09. The payment has been made to Shri Ramoji Rao (HUF) by the assessee on 28.02.008 falling within the financial year 2007-08 which ends on 31.3.2008. Therefore, as per the proviso to section 20 1(3), an order treating the assessee “as an assessee in default” has to be passed before 31st day of March, 2011. In the instant case, the show-cause notice for treating the assessee “as assessee in default” has been issued only on 15.12.2014 i.e. beyond 31.3.2011 and even beyond the period of 6 years even if the provision as amended by the Finance Act 2012 is taken into consideration. The period of 7 years has been brought in by the Finance Act, 2014 w.e.f. 1.10.2014 and therefore, cannot be applied to the case on hand as any amendment to the detriment of an assessee cannot be applied retrospectively. Therefore, in view of the proviso to sub-section 3 of section 20 1(1), which was in force till 1.10.2014, we are of the opinion that the order of the AO treating the assessee as “an assessee in default” is clearly barred by limitation and ground of appeal No. 2 is allowed.

7. Even otherwise, the AO has not treated the assessee as an “assessee in default” because the payee/ recipient has included the said non-compete fee in his return of income and has paid tax thereon. Therefore, the assessee has clearly not been treated as an assessee in default.

8. Ground No. 3 is against charging of interest u/s 201 (1A) of the Act. We find that the provisions of sub-section (3) of section 201(1) will not apply to charging of interest u/s 201 (1A) of the Act, as sub-section 3 clearly refers to only an order under sub-section (1) but and does not refer to an order u/s 201(1A) of the Act as a result, the TDS to be made from the payment cannot be recovered from the assessee. But, the liability of the assessee to make TDS has not been absolved. In the case before us, because the tax has been paid by the payee, the assessee is not treated as a defaulter. The Hon’ble Supreme Court in the case of Hindustan Coco Cola Beverages Ltd (cited Supra) has clearly held that the interest u/s 201 (1A) is compensatory in nature and that even if the payee has paid the tax on the receipt, the payer is liable to pay interest u/s 201(1A) of the Act from the date of deductibility to the date of payment of tax by the payee. It is therefore, held that the assessee is liable to pay the interest u/s 201(1A) of the Act. As regards the period for which the interest u/s 201(1A) is payable, the same is not pressed by the assessee and therefore, is rejected.

9. As regards Ground No. 3, the learned Counsel for the assessee submitted that the recipient of non-compete fee did not have taxable income even after considering the non-compete fee and therefore, the assessee is justified in not making TDS. However, we find that this contention is not substantiated by any evidence. Except for an oral statement in the grounds of appeal, the assessee has not been able to produce any evidence in support of such a contention. In fact, the AO has clearly brought out on record that the recipient Shri Ramoji Rao (HUF) has taxable income, and that after taking into consideration the non-compete fee received by him, the assessee has been assessed to tax at Rs. 108,47,26,715. The learned Counsel for the assessee has not been able to rebut this finding of the AO except to state that the TDS was required to be effected on non-compete fee which is taxable as business income and in view of the carry forward business loss, nothing remains to be taxed. Therefore, we are not convinced with the argument of the assessee that the assessee under had a reasonable cause to deduct the tax at source. Therefore, ground of appeal No. 3 is also rejected.

10. In the result, appeal in ITA No. 546/Hyd/2017 is only partly allowed.

ITA No. 547/Hyd/2017

11. In this appeal, the assessee is challenging the confirmation of penalty u/s 271C of the Act. The penalty u/s 271C is levied for non-deduction of tax at source u/s 194J of the It is the case of the assessee that the Revenue has always treated the payment of non-compete fee as a sham transaction and therefore, the AO could not have recorded a satisfaction that the assessee is liable to make TDS on such non-compete fee.

12. The learned DR, on the other hand, submitted that the assessee has always contended that it has paid the non-compete fee and thus is a business expenditure and in such circumstances, the assessee ought to have deducted tax at source and for failure to do so, the penalty u/s 271C is justified.

13. Having regard to the rival contentions and the material on record, we find that the requirement to make the payment and the genuineness of the payment of non-compete fee by the assessee to Shri Ramoji Rao (HUF) has been adjudicated by the Tribunal in the assessee’s own case for A.Y 2008-09 and the contention of the assessee that the non-compete fee is the business expenditure of the assessee has been upheld. The assessee has always contended that it is its business expenditure and therefore, it was required to deduct the tax at source u/s 194J of the Act. For failure to deduct the tax inspite of being liable to do so, the penalty u/s 271 C is clearly leviable. Though the learned Counsel for the assessee has placed reliance on various case law, we find that these cases are distinguishable on facts. In view of the same, we do not see any reason to interfere with the penalty order confirmed by the CIT (A).

14. In the result, appeal in ITA No. 547/Hyd/2017 is dismissed.

15. To sum up, ITA No. 546/Hyd/2017 is partly allowed and ITA No. 547/Hyd/2017 is dismissed.

Order pronounced in the Open Court on 29th November, 2017.

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