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Bangalore Water Supply & Sewerage Board v. Income-Tax Officer, Ward-19(1)
Structured Summary of the Legal Opinion
Factual and Procedural Background
The assessee is a Government of Karnataka undertaking engaged in providing water and sanitation services in the Bangalore Metropolitan Area. For implementation of the Cauvery Stage-IV water project, the assessee entered into consultancy and related financing arrangements with Pacific Consultants International (PCI) (a Japanese company), Mott Macdonald Ltd. (UK), Tata Consulting Engineers (India), and the Overseas Economic Cooperation Fund of Japan (OECF). Pursuant to these arrangements, the assessee made payments to foreign entities.
During assessment proceedings under section 143(3), the Assessing Officer (AO) observed that the assessee deducted tax at source at lower rates (initially 20% from payments up to July 2004, later supplementing with an additional 10% on 31-07-2004) whereas the AO held tax ought to have been deducted at 40%–48%. The AO treated the short deduction/short remittance as attracting section 201(1) (deeming person as assessee in default) and levied interest under section 201(1A).
The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who by a consolidated order dated 13-12-2006 dismissed the appeals, confirming the AO's levy. The assessee then filed second appeals before the Tribunal challenging, inter alia, the imposition of consequences under sections 201(1) and 201(1A) and raising additional grounds including limitation and characterisation of payments under the India–Japan Double Taxation Avoidance Agreement (DTAA).
Legal Issues Presented
- Whether proceedings under sections 201(1) and 201(1A) of the Income Tax Act are barred by limitation — specifically, whether the limiting period is four years from the end of the relevant financial year or six years (subject to a monetary threshold).
- Whether the nature of payments to PCI (characterised as "fees for technical services" under Article 12 of the DTAA) changes to business profits under Article 7 once chargeability is shifted to Article 7 (due to PCI having a permanent establishment in India), and the consequent impact on taxability and the rate at which tax should have been deducted.
- Whether the assessee can be held to be an "assessee in default" under section 201(1) where it deducted tax at source at a lower rate (30%) rather than the rate the AO considered applicable (40%–48%).
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee relied on the Delhi High Court decision in CIT v. NHK Japan Broadcasting Corporation (305 ITR 137) to contend that initiation of proceedings under section 201(1) must be within a reasonable time and that a period of four years from the end of the relevant financial year is reasonable; accordingly proceedings beyond four years are time barred.
- The assessee cited a Tribunal (Bangalore Bench) decision in TRO v. Bharat Hotels Ltd. and relied upon Sultan Battery Co‑operative Housing Society Ltd. v. CIT (261 ITR 364) to support limitation arguments (noting these decisions in the context of the differing approaches on limitation).
- The assessee contended that the Special Bench decision in Mahindra & Mahindra Ltd. v. DCIT ought not to be treated as binding on the present matter because the Special Bench had not considered the precise limitation issue as referred and any conclusion would be obiter dicta; where a conflict exists, the Delhi High Court decision should prevail.
- The assessee further argued substantively that even if section 201(1) applies to failure to deduct/pay, in this case the assessee had deducted tax (albeit at 30%), and therefore it could not be said to have wholly failed to deduct tax so as to be an assessee in default for the entire amounts.
Respondent's (Revenue's) Arguments
- The Departmental Representative supported the orders below, relying principally on the Special Bench decision in Mahindra & Mahindra Ltd. v. DCIT (122 TTJ (Mum.) (SB) 577), which held that proceedings under section 201(1) can be initiated within six years from the end of the relevant assessment year where the tax not deducted or not paid in respect of sums paid to a payee is equal to or exceeds Rs. 1 lakh, and within four years if less than Rs. 1 lakh.
- The revenue relied on authorities including Commissioner Of Income-Tax v. Trichur Co-Operative Bank Ltd., 184 CTR 400 (Ker.) 2003 and Thai Airways International Public Co. Ltd. v. ACIT, 2 SOT 389 (Mum.) 2005, to support the proposition that limitation applies to initiation of proceedings under sections 201(1) and 201(1A) and that the Special Bench's approach on monetary thresholds and time limits is applicable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. NHK Japan Broadcasting Corporation, 305 ITR 137 (Delhi High Court) | Held that where limitation is prescribed in the Act for initiating penalty/section 201(1) proceedings, a period of four years from the end of the relevant financial year is a reasonable time for initiation of proceedings under section 201(1). | The Tribunal considered this decision; it acknowledged NHK but found the Special Bench in Mahindra & Mahindra to be in consonance with NHK and therefore followed the Special Bench's framework where applicable. |
| Mahindra & Mahindra Ltd. v. DCIT, 122 TTJ (Mum.) (SB) 577 (Special Bench) | Held that limitation for initiating proceedings under section 201(1) is four years where the tax amount involved is less than Rs. 1 lakh and six years where the tax amount involved is Rs. 1 lakh or more. | The Tribunal in the present opinion expressly followed the Special Bench decision and held that a period of six years (subject to the Special Bench's monetary thresholds) is the time limit for initiating proceedings under sections 201(1) and 201(1A). The AO was directed to verify limitation accordingly. |
| TRO v. Bharat Hotels Ltd. (Tribunal, Bangalore Bench) (as cited in the file) | Considered limitation issue in light of NHK (Delhi HC) and Kerala High Court decisions; used in argument about whether proceedings are time-barred. | The Tribunal noted this decision as part of the assessee's reliance chain but ultimately preferred to follow the Special Bench's analysis which it regarded as consonant with NHK. |
| Sultan Battery Co-operative Housing Society Ltd. v. CIT, 261 ITR 364 (Kerala High Court) | Held that demand raised under sections 201 and 201(1A) is not barred by limitation (as cited in the file and discussed in other Tribunal decisions). | The Tribunal recorded that this Kerala High Court decision was relied upon in prior Tribunal considerations; however, it noted that other courts (and the Special Bench) had considered the interplay of higher court decisions and, on that basis, the Tribunal followed the Special Bench's approach instead. |
| Commissioner Of Income-Tax v. Trichur Co-Operative Bank Ltd., 184 CTR 400 (Ker.) 2003 | Relied on by the revenue to support the existence of a limitation principle for proceedings under sections 201(1) and 201(1A). | The Tribunal noted this authority among those cited by the revenue but its ultimate decision rested on following the Special Bench rule regarding the applicable time limits and monetary thresholds. |
| Thai Airways International Public Co. Ltd. v. ACIT, 2 SOT 389 (Mumbai) 2005 | Relied on by the revenue in support of the existence of limitation principles applicable to section 201 proceedings. | The Tribunal recorded that this decision was cited by the revenue; however, the Tribunal's disposition was to follow the Special Bench decision (Mahindra & Mahindra) as establishing the applicable limitation framework to be applied in the present appeals. |
| Bhatinda District Co-operative Milk Producers Union Ltd. (Apex Court decision — cited in the file) | Referenced in the context of whether Kerala High Court had considered the Apex Court decision when deciding limitation issues (as mentioned in the record). | The Tribunal observed that the Kerala High Court had not considered the Apex Court decision in Bhatinda in the context discussed in prior Tribunal materials; this observation formed part of the assessee's arguments relying on NHK, but the Tribunal ultimately adopted the Special Bench's approach. |
Court's Reasoning and Analysis
The Tribunal first clarified the legal effect of section 201(1): a person who does not deduct tax, does not pay tax, or who after deduction fails to pay whole or any part of the tax required to be deducted is deemed to be the "assessee in default" for such tax. Applying this to the facts, the Tribunal observed that the assessee had deducted tax at 30% whereas the AO held that tax should have been deducted at 40%–48%, and therefore the assessee had failed to deduct part of the tax and was thus to be deemed an assessee in default for the short deduction.
The principal legal question before the Tribunal was whether proceedings under sections 201(1) and 201(1A) were barred by limitation. The Tribunal reviewed the competing authorities cited by the parties. It noted the Delhi High Court decision in NHK (supporting a four-year reasonable period) and the Special Bench decision in Mahindra & Mahindra, which after considering NHK concluded that the limitation period should be four years where the tax involved is less than Rs. 1 lakh and six years where the tax involved is Rs. 1 lakh or more.
The Tribunal found that the Special Bench had considered the Delhi High Court decision and that the Special Bench's order was in consonance with NHK while prescribing monetary thresholds for the applicable limitation period. On that basis, the Tribunal stated it was inclined to follow the Special Bench's approach and held that a period of six years (subject to the monetary limits prescribed by the Special Bench) is the time limit for initiating proceedings under sections 201(1) and 201(1A).
Accordingly, the Tribunal directed the AO to verify the period of limitation in the matters before it and quash those proceedings where initiation was after six years from the end of the relevant assessment year. For cases where initiation was within the prescribed period, the Tribunal remitted the issues on merits to the file of the CIT(A) for de novo consideration.
Holding and Implications
Core Holding: The Tribunal held that the limitation period for initiating proceedings under sections 201(1) and 201(1A) is governed by the Special Bench rule in Mahindra & Mahindra — namely, six years where the tax amount involved is Rs. 1 lakh or more, and four years where it is less than Rs. 1 lakh — and directed the AO to verify limitation under this framework.
Direct Consequences and Orders:
- The AO was directed to verify the period of limitation in each case and to quash proceedings where initiation was after six years from the end of the relevant assessment year (subject to the monetary limits prescribed by the Special Bench).
- In cases where limitation did not bar the proceedings, the Tribunal remitted the merits to the CIT(A) for reconsideration de novo.
- The Tribunal concluded by allowing the assessee's appeals for statistical purposes.
Implications beyond these direct orders were not elaborated in the opinion. The Tribunal applied the Special Bench's limitation framework rather than creating a new rule of law in the text of this opinion; the effect of the decision is to require the assessing authority to verify and apply the Special Bench monetary/temporal thresholds when deciding whether proceedings under sections 201(1) and 201(1A) are time-barred.
End of summary. This summary is prepared strictly on the basis of material contained in the provided opinion and does not add or infer facts beyond that text.
1. All these are assessee's appeals for the Assessment Years: 1998–1999 to 2000–2001 & 2002–2003 to 2004–2005 against the orders of CIT(A) in confirming the levy of interest u/s 201(1) and 201(1)(A) of the IT Act.
2. The brief facts of the case are that the assessee is a Government of Karnataka undertaking. It is engaged in providing water and sanitation in Bangalore Metropolitan Area. During the relevant assessment year, the assessee and Pacific Consultants International (PCI), a company organized and established under the laws of Japan, entered into an agreement, for consultancy services vide agreement dated 29-11-1996 in consortium with Mott Macdonald Ltd., (UK) and Tata Consulting Engineers of India for implementation of Cauvery Stage-IV to draw 730 Mn. Litres of water per day from Cauvery River. The assessee by virtue of a Memorandum of Understanding (MOU) dated 26-05-1995 entered into an agreement with the Overseas Economic Cooperation Fund of Japan (OECF) whereby the Government of India obtained a loan vide loan agreement N. ID-P109 dated 26-05-1996 from OECF for the implementation of the Water Supply and Sewerage Project in question. Pursuant to these agreements, the assessee had to make payments to these foreign entities. During the assessment proceedings u/s 143(3), the AO observed that the assessee is liable to deduct tax at source on the payments made to the foreign company and the assessee had deducted only 20% from all the payments made up to July, 2004 and later on, realizing short remittance of tax deducted an additional 10% on 31-07-2004. He held that the assessee was supposed to deduct tax at source at 40% to 48%, whereas it deducted the tax at source at 30% and paid the same and this has resulted in short remittance of tax attracting the provisions of section 201(1) which provide for recovery of tax alongwith interest. Accordingly, the AO declared the assessee to be assessee in default u/s 201(1) and also levied the interest u/s 201(1A) of the IT Act.
3. Aggrieved by the same, the assessee preferred appeals before the CIT(A) for all the relevant assessment years and the CIT(A) by a common and consolidated order dated 13-12-2006 dismissed the same upholding the orders of the AO.
4. Aggrieved by the same, the assessee is in second appeal before us.
5. The learned counsel for the assessee Shri P. Dinesh, submitted that this Tribunal had already considered the issue on merits and had set aside the same to the file of CIT(A) for re-consideration for the subsequent assessment years. As regards the appeals for the assessment years 1998–1999 to 2002–2003 are concerned, learned counsel for the assessee submitted that the assessee has raised the additional grounds of appeal relating to the issue of limitation and therefore, these appeals are pending before the Tribunal.
Going through the files, we find that the assessee has raised the following additional grounds of appeal;
1. The orders in respect of 201 passed for the FYs: 1998–1999, 1999–2000, 2000–2001 & 2001–2002 have become time barred by limitation as orders for these years were passed beyond four years from the end of the relevant financial years.
2. The lower authorities erred in not appreciating that merely because the chargeability of the incomes of PCI is shifted to Article 7 instead of Article-12, the nature of the income (FTS) does not change to business income and the income should be taxed at the rates prescribed under proviso of sec. 44D r.w.s 115A of the Act and/or as per Article 12, whichever is more beneficial.
3. The CIT(A) erred in confirming the action of the AO in concluding that the income of the recipient to be assessed at 48% (till AY: 2001–2002) and at 40% (from AY: 2002–2003 to 2005–2006) and hence, the appellant should have deducted tax @48% and 40% respectively and on failure to do so, erred in confirming the penal consequences under sec. 201.”
4. The CIT(A) erred in confirming the action of the AO in holding that the payment which is in the nature of “fees for technical services” become business income for the recipient, once it falls under Article 7 instead of Article 12 of Double Tax Avoidance Agreement (DTAA) between India and Japan, since the recipient Pacific Consultants International (PCI) has a permanent Establishment in India”.
On the issue of the additional grounds of appeal relating to the limitation, the learned counsel for the assessee placed reliance upon the decision of the Delhi High Court in the case of CIT v. NHK Japan Broadcasting Corpn reported in 305 ITR 137, wherein it has been held that where the limitation was prescribed in the Act, for initiating penalty proceedings, the penalty proceedings must be initiated within reasonable time and for initiating the proceedings u/s 201(1) for non-deduction of tax at source, a period of four years is a reasonable time. The learned counsel also placed reliance upon the decision of the Tribunal at Bangalore Bench in the case of TRO v. Bharat Hotels Ltd., wherein the Tribunal after considering the decision of the Delhi High Court and also the decision of the Kerala High Court in the case of Secretary, Sultan Battery Co-operative Housing Society Ltd. v. CIT reported in 261 ITR 364 (wherein it was held that the demand raised u/s 201 & 201(1A) is not barred by limitation) and held that the Hon'ble Kerala High Court has not considered the decision of the Apex Court in the case of Bhatinda District Co-operative Milk Producers Union Ltd. and therefore, the decision of the Hon'ble Delhi High Court is applicable and the AO could not have initiated the proceedings after the end of 4 years from the relevant financial year.
6. The learned DR on the other hand, supported the orders of the authorities below and submitted that the issue is now covered by the decision of the Special Bench of the Tribunal in the case of Mahindra & Mahindra Ltd. v. DCIT reported in 122 TTJ (Mum.) (SB), 577 wherein after considering the decision of the Hon'ble Delhi High Court in the case of NHK Japan Broadcasting Copn. (2008) has held that the proceedings u/s 201(1) can be initiated in the extended period of 6 years from the end of relevant assessment year, if the income by virtue of sum paid without deduction of tax at source by the payer chargeable to tax in the hands of the payee is equal to or morethan one lakh rupees. If, on the other hand, such amount is less than 1.00 lakh then the lower period of 4 years as prescribed u/s 149(1)(a) from the end of the relevant assessment year is available for initiation of proceedings u/s 201(1). As regards the argument that there was no limitation period prescribed in the Act for initiating the proceedings u/s 201(1) & 201(1A), she placed reliance upon the following decisions;
1. Commissioner Of Income-Tax v. Trichur Co-Operative Bank Ltd., 184 CTR 400 (Ker.) 2003
2. Thai Airways International Public Co. Ltd. v. ACIT, 2 SOT 389 (Mum.) 2005.
In the rejoinder, learned counsel for the assessee submitted that the special Bench of the ITAT in the case of Mahindra & Mahindra Ltd., considered the following question in the appeal before it;
‘Whether on the facts and the circumstances and in law an order u/s 195 read with sec. 201 of the IT Act, 1961 is barred by limitation within four years from the end of the relevant financial year in the absence of any express provision in the Act”
7. He submitted that the issue of limitation with respect to initiation of proceedings does not seem to be the issue referred by the Special Bench by its proceedings and therefore, any conclusion drawn by the Special Bench would at best be in the nature of ‘obiter dicta’ not binding on any other assessee.
8. He submitted that even if there is any conflict between the decision of the Special Bench and the Delhi High Court in the case of NHK Japan Broadcasting Corpn., it is the decision of the Hon'ble High Court which should prevail and has to be followed.
Thus, according to him, the appeals are to be allowed and the orders u/s 201(1) and 201(1A) are to be quashed as barred by limitation. Another point raised by the assessee is also that provision of sec. 201(1) is for failure to deduct or pay but in the case of assessee, the assessee has deducted the tax at source at 30% and therefore, the assessee cannot be set to be the ‘assessee in default’.
9. Having heard both the parties and having considered the rival contentions, we find that u/s 201(1), where any person does not deduct or does not pay or after so deducting fails to pay the whole or any part of the tax which he is required to deduct in accordance with the provisions of the Act, even such person shall deemed to be the ‘assessee in default’ respect of such tax. In the case before us, the assessee has deducted the tax at source at 30% instead of 40% to 48% of the payments. Thus, it has failed to deduct part of the tax as required by or under this Act and therefore, he has to be deemed to be ‘assessee in default’ in respect of such short deduction of tax. The only question before us is now whether the initiation of proceedings u/s 201(1) and 201(1A) of the Act are barred by limitation.
10. After considering the various judicial precedents quoted by the assessee as well as by the revenue before us, we find that the Special Bench of the Tribunal in the case of Mahindra & Mahindra after considering the decision of the Hon'ble Delhi High Court in the case of NHK Japan Broadcasting Corporation only a has come to the conclusion that the limitation period for initiating penalty proceedings u/s 201(1) & 201(1A) is 4 years from the end of relevant assessment year where the tax deducted is less than Rs. 1.00 lakh and if it is more than 1.00 lakh, the limitation period would be 6 years. As the Special Bench has considered the decision of the Hon'ble Delhi High Court and the order of the Tribunal is in consonance with the decision of the Delhi High Court and it has only prescribed the quantum limits and the time limit for such quantum, we are inclined to follow the decision of the Special Bench of the Tribunal and hold that period of 6 years is the time limit for initiating proceedings u/s 201(1) and 201(1A) of the IT Act, subject to the monetary limits prescribed by the Special Bench. Accordingly, we direct the AO to verify the period of limitation in the above cases and where the initiation of proceedings is after 6 years from the end of relevant assessment year, in those cases the proceedings are held to be quashed.
In the other cases, the issue on merits is remitted to the file of the CIT(A) for de novo consideration.
11. In the result, the assessee's appeals are allowed for statistical purposes.
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