Commissioner of Income Tax, International Taxation-2 v. Pacific Consultants International Inc

1. These appeals by the Revenue under Section 260A of the Income Tax Act, 1961('Act') are directed againstthe common order dated 12^*^.January 2015 passed by the Income Tax Appellate Tribunal('ITAT')in ITA Nos. 1694 to 1699/Del/2006 for the Assessment Years('AYs')1997-98 to 2002-

03.

2. By these appeals,the Revenue is questioning the decision ofthe ITAT in deletingthe penalty imposed onthe Respondent Assessee under Section 271(1)(c)ofthe Act.

3. The Assessee which has its headquarters in Japan is engaged in carrying on the business of rendering engineering services to various projects in India.It offered technical consultancy services to the projects funded by the Overseas Economic Cooperation Fund and two of such projects were DevelopmentofTouristInfrastructure along the Buddhist Circuit('Buddhist Circuit Project')and the Ajanta Ellora Conversion & Tourist Development Project('Ajanta ElloraProject').

4. An agreement dated 19'^ October 1990 was entered into between the Assessee and the Government of India through the Ministry of Tourism ITA Nos.455,456,457,458,460&512/2015 Page3of[8] l^A ('MOT').Clause 5 ofthe said agreement dealt with payment oftaxes on the income earned by the Assessee in relation to the above projects. It read as under: "5.01 The Government warrants that the Foreign Consultant and their staff shall be exempted from the payment of all taxes, duties, fees levies and other impositions under the laws and regulations of India or the Government shall reimburse to the consultant the cost ofthe said account, ifthe exemption is not granted by the Tax Authorities in respect of: 5.01.1. any payment made to the Foreign Consultant or to the Expatriate staff in connection with the carrying out of the services: 5.01.[2] any equipment,materials,and supplies broughtinto India for the purpose of carrying out the services and which will be subsequently re-exported therefrom".

5. An amendment was made to the above agreement on August 1998 which contained the following stipulation in relation to the above Clause 5.01: "3) The Government are pursuing the matter of tax exemption for PCI and their staff as mentioned in Article

5.01 of the Original Agreement. In the event that exemption is not granted, the Government will pay any taxes due directto the relevanttax authority."

6. A second agreement was entered into between the Assessee and the MOT on 10^*^ August 1993 whi relation to paymentoftax. th on 10 August 1993 which also contained a similar clause,as above in

7. The case ofthe Assessee is that it was under the bonafide beliefthat the taxes would be directly remitted by the MOT to the Government ofIndia.In ITANos.455,456,457,458,460&512/2015 Page4of[8] relation to the issue of non-deduction of tax deducted at source ('TDS') from the payments made by it to foreign consultants, the issue travelled to this Court at the instance of the Assessee which filed appeals before the Tribunal beingITA Nos.1635 to 1642forthe AYs 1991-92to 1998-99.The said appeals ofthe Assessee were allowed by the ITAT by the order dated th 20 December 2004.This order was upheld by the Court on 15""November 2006 when it dismissed the Revenue's appeal againstthe said order.

8. As far as the present appeals are concerned, this is the second round of litigation on the issue ofpenalty. In the first round,the ITAT had by its order dated 13"^ December 2006 deleted the penalty. That order was set aside by this Court and the matter was remanded to the ITAT for deciding the appeals afresh in the light ofthe amendment by which Section 271(IB) ofthe Act was introduced.

9. Having noticed that no return ofincome had been filed by the Assessee for the AYs 1997-98 to 2000-01,a notice under Section 148 ofthe Act was issued by the Assessing Officer ('AO') on 1 September 2003. For AY 2001-02,notice under Section 148 ofthe Act was issued on 8'*^ November

2004. Pursuant to the above notices, the Assessee filed returns for AYs 1997-98 to.2000-01 on 20^'' August 2004 and for AY 2001-02 on lO'*" January 2005. Pursuantto the assessment orders passed by the AO for the aforementioned AYs as well as AY2002-03 on 28^''Februaiy and F'March 2005,the Assessee paidthe requisite tax along with interest.

10. Penalty proceedings were separately initiated under Section 271(1)(c) for the aforementioned AYs by a notice issued on 16"^ August 2005. A ITA Nos.455,456,457,458,460&512/2015 5 n common order dated 31®^ August 2005 was passed by the AO levying penalty for the AYs in question and this was affirmed by the CIT(A)by a common order dated 28^ February 2008. Thereafter, the Assessee went in appeal before the ITAT which has by the impugned common order dated 12^*^ January2015 deleted the penalty.

11. The case of the Revenue is that the Ministry of Finance ('MOF') by letter dated 7^^ January 2000 addressed to the MOT,rejected the latter's application for grant ofexemption for payment ofincome tax under Section 10(8B)ofthe Acton the ground thatthe consultancy income ofthe Assessee or its employees did not qualify for exemption. The matter was again taken up by the MOT with the MOF for reconsideration. The MOF,however, by letter dated 12^*^ December 2001 advised the MOT that its request for exemption could not be accepted. It is accordingly contended by the Revenue that the Assessee was fully aware that the income from the two projects were not exempt from income tax and therefore it was incumbent on the Assessee not only to file returns disclosing the income earned from the above projects but in any event after issuance of the notices under Section 148 of the Act such income ought to have been disclosed and offered to tax in the returns filed pursuantto the said notices. It is stated that the fact thatthe Assessee was earning income from the two projects came to light only when a survey was conducted by the Income Tax Department under Section 133A ofthe Act.Itis accordingly contended thatthe Assessee had concealed the material particulars of its income earned from the two projects. It is urged that there was no justification for the ITAT to have deleted the penalty under Section 271(1)(c)ofthe Act. ITA Nos.455,456,457,458,460&512/2015 Page6of[8]

12. The case ofthe Assessee,on the other hand,is that it was under the bona fide beliefthat in terms ofthe specific clause in the agreement entered into by it with the MOT that it was MOT which would remit the taxes in question directly to the MOT,evenifthe requestfor exemption was rejected by the MOT.It was further contended that as far as returns filed for AYs 1997-98 to 2001-02 are concerned,a note was appended to the returns filed in which the circumstances under which the income earned from the projects was not being offered to tax, was explained. It is submitted that the necessary tax had in fact been paid in respect ofthe earnings from the two projects by the MOT and therefore there was no revenue loss. Reliance is placed on the decisions of the Supreme Court in Hindustan Steel Ltd. v. State ofOrissa(1972)83ITR 26(SC),Price Waterhouse Coopers(P)Ltd.