ORDER
Pramod Kumar, A.M.
1. These three appeals relate to the same assessee and arise out of common set of facts. We, therefore, deem it expedient to dispose of all these appeals by this consolidated order, Out of these three appeals which are subject-matter of this order, ITA No 103/Cal/2001, filed by the assessee, and ITA No 237/Cal/2001, filed by the Revenue, are cross-appeals against the order dt. 28th Nov., 2000, passed by the CIT(A)-I Kolkata in the matter of order under Section 201(1A) r/w Section 194C of the IT Act, 1961. ITA No 238/Cal/01 pertains to penalty under Section 221 in the matter of same deduction issue. We will take up all the three appeals together.
2. In order to properly appreciate controversy requiring our adjudication, it is necessary to take a careful look at rather peculiar facts leading to this litigation before us. ITC Ltd. (hereinafter referred to as ITC) entered into an agreement with Pak~Indo-Lanka Committee (hereinafter referred to as PILCOM), organisers of 1996 World Cup Cricket Tournament, for sponsoring the said tournament. In consideration of being granted the sponsorship, ITC was required to make payment of UK £ 8 million out of which 55 per cent was to be paid in British pounds and the balance 45 per cent was to be paid in Indian rupees. It was under these arrangements that the ITC made, besides other payments, following four payments to PILCOM which are subject-matter of this litigation before us.
July 1995
Rs. 7,86,55,500
Paid in Indian rupees
July 1995
Rs. 9,62,88,500
Paid in pound sterling
November 1995
Rs. 6,78,51,000
Paid in Indian rupees
November 1995
Rs. 8,21,95,800
Paid in pound sterling
However, before we come to the core issue regarding tax deductions from these payments, and Revenue’s objections in the matter, we may briefly explain certain relevant developments which took place before these payments were made. It appears that on 9th May, 1995, the assessee tax deductor, with a view to ascertain its withholding tax liability from payments under the sponsorship arrangements, wrote a letter to the PILCOM which was responded to by PILCOM’s convenor secretary Shri J. Dalmiya as follows:
Thank you for your letter, dt. 9th May, 1995, regarding deduction of tax at source.
We hereby inform you that the headquarters of PILCOM are at Dr. B.C. Roy Club House, Eden Gardens, Calcutta 700 021. In view of this, PILCOM has a resident status in India.
We trust you would find the information useful.
3. The first of these payments of Rs. 9,62,88,500 (being rupee equivalent of British pounds 19,25,000) became due and payable in July, 1995 and Revenue, in response to assessee tax deductor’s application dt. 21st June, 1995, allowed the assessee tax deductor to make this payment without any deduction of tax at source. The No objection certificate issued by the Dy. CIT, Special Range 16, Kolkata, inter alia, read as follows :
“I have no objection to ITC Ltd. 37 Chowringhee, Calcutta 700071 remitting sterling pounds 19,25,000 (sterling pounds Nineteen lakhs twenty-five thousand only) to Pak-Indo-Lanka Committee being sponsorship fees.
The remitter (in his capacity as representative-assessee) and the person to
whom money is remitted has no liabilities for the remittance referred to
above……”
4. Similarly, the assessee tax deductor was allowed to make remittance of Rs. 8,21,95,800 (being rupee equivalent of sterling pounds 15,40,000) without any deduction of tax at source. In the meantime, the assessee also made two payments in Indian rupees of Rs. 7,86,55,500 and Rs. 6,78,51,000 in the month of July 1995 and November 1995, respectively. Although the assessee did not obtain No objection certificates for making these payments, apparently there was no such procedural requirement for rupee payments, no taxes were deducted at source from these payments which admittedly were of similar nature as the sterling pound payments.
5. On 19th Jan., 1996, the assessee tax deductor received letter dt. 30th Jan., 1996, from the ITO [TDS Ward 2l(3), Calcutta] which inter alia, requisitioned following information
1. Out of amount payable to M/s PILCOM, how much total amount has been paid by your company (the assessee tax deductor) ?
2. Out of total amount paid to PILCOM, how much amount has been paid in foreign currency and how much in Indian rupees ?
3. What is the supporting evidence regarding residential status of the PILCOM ?
The aforesaid letter further stated that it has been observed that the assessee tax deductor has paid a total sum of Rs. 32,49,90,800 to PILCOM without any deduction of tax at source and required the assessee to show cause why penalty proceedings should also not be initiated against the assessee tax deductor.
6. Unable to reconcile conflicting stand taken by different officers of the Revenue, on 9th Feb., 1996, the assessee tax deductor approached the Chief CIT-II Kolkata, explaining the admitted facts of the case and making inter alia, the following request :
“We request you to advise us the tax, if any, to be deposited on the above payments once the event is over, We are making this request to avoid any future dispute on the TDS. This has assumed importance as only one payment is due to PILCOM from us that is in April 1996 for £ 1.7 million pounds and any tax that we have to deduct can be out of this amount only.”
The. reply to the aforesaid letter is reproduced below, in entirety, for ready reference ;
“No CC-II/Misc. Corres/95-96/3165
9th Feb., 1996
Executive Vice President (Taxation)
ITC Ltd.
37, Chowringhee,
Calcutta 71
Sub : TDS on payments to PILCOM
Ref : Your letter, dt. 9th Feb., 1996
With reference to the above, I am to state as under :
In respect of PILCOM in Indian rupees, you should deduct tax @ 2 per cent under Section 194(c).
In respect of payments to PILCOM in pound sterling, you must deduct tax @ 10 per cent
You are requested to deposit the sums immediately.
Sd/xx
Chief CIT-II, Cal.
Copy to CC(Admn.)r Calcutta, and CIT, WB VIII, Calcutta
This has been discussed with the Chief CIT telephonically. Earlier the ITC had approached the Dy. CIT, Spl Range 16, who, by mistake, had issued NOC in respect of payments in July and November 1995. It appears, therefore, that the ITC Ltd. had genuine doubts about their liabilities for TDS. It seems a lenient view is called for in the matter of penalty proceedings under Section 271C
Sd/xx
Chief CIT-n, Cal”
7. Within a week from the date of the aforesaid letter and on 16th Feb., 1996, the assessee tax deductor computed the tax deductible at source, as per the advice set out in Chief CIT’s letter, and deposited Rs. 2,64,30,312 in the Government Treasury. The assessee’s efforts to keep the, Revenue in good spirits by seeking their advice informally and fully abiding by the same without even questioning apparent and glaring inconsistencies such as giving two rates of tax deduction for the same nature of payment and to the same recipient-perhaps merely because payments were made in two different currencies-were not good enough to beget lasting peace, but earned only a short respite.
8. On 15th Jan., 1997, AO (TDS) initiated another round of proceedings which ultimately culminated in AO (TDS) raising demands (a) under Section 201(1A), on account of interest from the date on which tax deductible in the month of July and November should have been deposited and till the date on which tax was actually deposited i.e. 16th Feb., 1996; and (b) penalty under Section 221 (1) for non deduction of tax at source from the payments made to PILCOM in July and November 1995. These demands worked out to Rs. 10,79,652 under Section 201(1A) and Rs. 1,00,00,000 under Section 221(1), respectively. Aggrieved, assessee carried the matter in appeal before the CIT(A) who held that the amounts paid by the assessee tax deductor were liable to deduction of tax at source under Section 194C as in the nature of advertisement payments and, accordingly, the assessee tax deductor was liable to deduct tax at source @ 1 per cent of payments. The CIT(A) directed that the demand under Section 201(1A) is to be recomputed on that basis. As far as penalty demand under Section 221(1) Is concerned, the CIT(A) held that “although the appellant (assessee) was under the obligation to deduct tax of Rs. 32,49,908 under Section 194C from the payments made to PILCOM, it had good and sufficient reasons for not depositing the amount in time”, and, on that basis, deleted the penalty under Section 221(1). The assessee is aggrieved of CIT(A)’s upholding, in principle, liability under Section 201 (1A) and the Revenue is aggrieved of CIT(A)’s restricting the Section 201(1A) demand on the basis of TDS liability @ 1 per cent, as against the TDS liability of 10 per cent on sterling pounds and TDS liability of 2 per cent on Indian rupees payments, and of CIT(A)’s deleting the penalty of Rs. 1 crore under Section 221(1). Both the parties are thus in appeal before us;
9. We have had the benefit of hearing Shri Singh, learned Departmental Representative, and Shri Mitra, learned counsel for the assessee. We have also had the benefit of carefully perusing the orders to the authorities below, as indeed the elaborate paper book filed by the assessee, and deliberating upon the applicable legal position as also factual matrix of the case.
10. Let us first take up the matter of penalty under Section 221(1), amounting to Rs. 1 crore, for the assessee tax deductor being an assessee in default in respect of amounts which, according to the Revenue, the assessee tax deductor should have deducted in the month of July and November 1995 but the assessee deposited the amount only on 16th Feb., 1996.
11. This issue, even on undisputed facts, presents little difficulty. In the present case, the AO (TDS) has Imposed penalty for non-deduction of tax at source by the assessee tax deductor in the months of July 1995 and November 1995, and, in any event, it is not the Revenue’s case that the taxes were deducted at source but the delay incurred in depositing the same. As held by a coordinate Bench in the case of ITO v. Titagaih Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal), to which one of us was a party, “that penalty under Section 221(1) cannot be imposed for the cases of non-deduction and short deduction of taxes at source, which are undisputedly covered by the specific provisions of Section 271C so far as period after 1st April, 1989, is concerned.” The relevant period being admittedly after 1st April, 1989, penalty under Section 221(1) is not applicable on the facts of this case. Even on merits, we find it is not in dispute that the assessee was issued No objection certificate by the Revenue for making the remittances without any deduction of tax at source and the jurisdictional Chief CIT himself has been on record to say that the assessee tax deductor had genuine doubts about its liability to deduct tax at source. On one hand the AO (TDS) has accepted the Chief CIT’s finding, which had no statutory force anyway, about TDS liability of the assessee, and, on the other hand, he chose to disregard Chief CIT’s observations about bona fides of the assessee. In view of the fact that the conduct of the assessee, on the facts of the present case, is clearly bona fide, no penalty is irnposable, in any event, on account of alleged non-deduction of tax at source. At every stage, the assessee has behaved in a transparent manner, befitting for a responsible corporate citizen, and even then if a lapse occurs, such a lapse cannot, in our considered view, be visited with any penal consequences. Penalty proceedings are inherently quasi-criminal proceedings and once that the person being subjected to penalty proceedings is able to demonstrate bona fides of his conduct, the very basis of such proceedings is laid to rest. In view of these discussions, we support the conclusions arrived at by the CIT(A) so far as cancellation of penalty under Section 221(1) is concerned, and decline to interfere in the matter.
12. Let us now move on to the controversy regarding levy of penal interest under Section 201(1A).
13. The question of interest liability under Section 201(1A) can only arise in a situation in which liability for deduction of tax at source under Section 201(1) is already established. In fact, Section 201(1A), for that purpose, is consequential in nature. In the present case, the assessee has sought advice from the Chief CIT about his views on assessee TDS liability, and, in deference to the views so expressed by the Chief CIT, deducted the tax at source, Such an obliging conduct by the assessee does not, however, necessarily lead to the conclusion that the tax deduction liability so accepted by the assessee was in fact his statutory liability to deduct tax at source. A concession by the assessee, for example, cannot clothe the same as an exposition of legal position regarding assessee’s statutory liability. We must, therefore, first examine as to what precisely was assessee’s liability for deduction of tax at source on the facts of the present case and, then, if necessary, move on to the question of assessee’s liability to pay interest under Section 201(1A) on non-deduction of tax at source.
14. Let us take a look at the relevant aspects of scheme of Section 194C which applies to the advertisement payments to a resident assessee, which, beyond dispute, PILCOM is. Section 194C inter alia provides that any company responsible for paying any sum to any resident for carrying out any work in pursuance of a contractor and the company, shall, at the time of credit or payment thereof (whichever is earlier), deduct an amount equal to one per cent in case of advertising. Expln. III, which is inserted in Section 194C w.e.f. 1st April, 1997, states that “for, the purpose of this section, the expression “work” shall also include, inter alia, ‘advertising’. Section 194C(4) provides that where the AO is satisfied that the total income of the recipient justifies the deduction of tax at source at any lower rate or no deduction of tax at source, the AO shall, on an application being made by the recipient, give him such certificate as may be appropriate. Section 194C(5) further provides that where any such certificate is given, the person responsible for deduction of tax at source shall, until such a certificate is cancelled by the AO, deduct income tax at the rate specified in such certificate or deduct no tax, as the case may be.
15. We thus find that even in cases where provisions of Section 194C are admittedly applicable on the payments, assessee tax deductor’s liability to deduct taxes at source is not absolute. In case the assessee tax deductor is advised, notwithstanding the admitted applicability of these provisions, by the Revenue that no tax deduction at source is warranted or such a tax deduction at lower rates will sufficiently safeguard the interests of Revenue, the rigours of Section 194C stand automatically relaxed, and such a relaxation holds good till the time such an advice of the Revenue, for whatever reason, is withdrawn. In other words, irrespective of assessee’s tax deductor’s statutory obligations under Section 194C(2), during the period in which the advice of the Revenue for non-deduction or short deduction of tax at source are in force, the assessee tax deductor is not under any obligation to deduct the tax at source.
16. In the present case, the assessee approached the authorities for ascertainment of TDS liability from payments to PILCOM and the assessee, vide letter dt. 22nd June, 1995, was advised that the assessee tax deductor being “remitter (in his capacity as representative assessee) and the person to whom money is remitted has no liabilities for the remittance referred to above……”. It was only on 9th Feb., 1996, that the assessee was advised by way of a non-statutory communication from the Chief CIT-E, Kolkata,. that the above, and such other certificate were issued by mistake by the AO, Special Range 6, Kolkata. Even if the above communication from Chief CIT-n, Kolkata, is treated as cancellation of earlier certificate, which categorically stated that the assessee tax deductor ( i.e. ITC Ltd.) and the recipient of the said sum (i.e., PILCOM) had no income-tax liabilities in respect of the said payments, the assessee cannot be held responsible for not deducting the tax at source during the period when the Revenue’s advice, extracted above, was not withdrawn. The assessee tax deductor cannot be expected to have clairvoyance of knowing deviation from the stand that the Revenue authorities may take from time to time, and nor, for that purpose, the Revenue authorities can withdraw their advice, based on which assessee tax deductor has already acted, with retrospective effect. While it is true that the certificates issued by the Revenue authorities were not, strictly speaking, in accordance with the enabling provisions of the IT Rules, as relevant to Section 1940(4), but the fact remains that in essence Section 194C(4) and (5) lay down that where the assessee tax deductor has an authorization from the AO that the tax may be deducted at lower rate or the tax may not be deducted at all from payments being made to a resident, otherwise covered, under Section 194C(2), the assessee tax deductor is under any obligation to deduct the tax at a lower rate or not to deduct the tax at all, as the case may be. On the facts of the present case, this provision is complied with in substance and in spirit.
17. In the light of these discussions, we are of the considered view that during the period of 22nd May, 1995, to 8th Feb., 1996, by no stretch of logic, the assessee tax deductor could be said to be under any obligation to deduct tax at source from payments made to PILCOM. The tax deduction liability at best came into force only on 9th Feb., 1996, and since the TDS liability, even on the payments made during the aforesaid intervening period, was computed and paid within a week from 9th Feb., 1996, there was no delay in deduction and deposit of tax at source. Viewed thus, levy of interest under Section 201(1A), which could have come to play only in the event of delay in deduction or deposit of tax at source, was not applicable on the facts of this case.
18. We may also refer to Hon’ble Calcutta High Court’s following observations in the case of British Airways v. CIT (1991) 193 ITR 439 (Cal) :
“There is another aspect of the case. The liability to pay tax is of the recipient of the income. Deduction of tax at source is only a method of realising that tax. The tax that is paid by the employer is on behalf of the employee and the amount of tax deducted has to be credited to the account of the employee and is treated as the income of the employee. Even if the employer does not deduct and pay the tax, the employee will be liable to pay the tax in the usual course on the full amount of salary. The interest that is payable under Section 201(1A) is only up to the date on which such tax is actually paid. The interest will stop running when the amount of tax which should have been deducted at source is actually paid by the employer or by the employee.”
It would thus appear that the interest liability under Section 201(1A) has been treated as compensatory for delay in realization of taxes. As soon as the taxes due to the State are realised, as per law laid down by Hon’ble jurisdictiorial High Court, the levy of interest under Section 201(1A) will come to a halt. As a corollary to this proposition, when no taxes are ultimately due to the State, as in the case of the payments to tax exempt entities, levy of interest under Section 201(1A) does not come to the play at all.
19. In the present case, PILCOM was a tax, exempt entity and, therefore, in the light of the school, of thought emerging from discussions in foregoing paragraph, levy of interest under Section 201(1A) did not at all come to the play. For this reason also, levy of interest under Section 201(1A) was vitiated in law.
20. In the light of the above discussions we support the conclusions arrived at by the CIT(A) so far as cancellation of penalty under Section 221 is concerned. We further hold that the, levy of interest under Section 201(1A), on the facts of the present case, was unsustainable in law and, accordingly, we cancel the demand under Section 201(1A). Since the very levy of interest under Section 201(1A) is cancelled, Revenue’s grievance against the rate at which tax was held to be deductible, and other peripheral issues, become redundant.
21. In the result, assessee’s appeal i.e., ITA No 103/Cal/2001 is allowed, and Revenue’s appeals i.e., 237 and 238/Cal/2001 are dismissed.