The order of the Bench was delivered by
I. C. Sudhir (Judicial Member)-The Revenue has impugned the action of the learned Commissioner of Income-tax (Appeals) in deleting the penalty of Rs. 18,02,291 levied under section 271(1)(c) of the Act.
2. Heard and considered the arguments advanced by the parties in view of the orders of the authorities below, material available on record and the decisions relied upon.
3. Being a tax resident of the UK, the assessee opted to be taxed in India under the provisions of India-UK Double Taxation Avoidance Agreement for the previous year relevant to the assessment year under consideration. As per the assessee under the provisions of the Tax Treaty, income derived by him from supply of network equipment (hardware and software) to Indian customers qualified as "business profits" and, therefore, not liable to taxation in India under the provisions of article 7(1) of the Tax Treaty in the absence of a "permanent establishment" (PE) of the assessee in India. Accordingly, the assessee did not offer the revenue from supply of network equipment to tax in India.
3.1 In response to the notice under section 142(2) requiring the assessee to file its return of income, it filed a letter submitting that it did not constitute a permanent establishment in India under the terms of the Tax Treaty and is not taxable in India. In compliance with further notice issued under section 142(1) it, however, filed its return of income declaring "nil" income. It was selected for scrutiny and in the assessment framed under section 143(3), income earned from some sources was taxed. The entire revenue from supply of hardware was held to be taxable in India and profit margins at the rate of 40 per cent. were attributed to the Indian activities. Income from supply of software was taxed as "royalty" at the rate of 30 per cent. on a gross basis on the ground that software has been licenced by the assessee and not sold. The learned Commissioner of Income-tax (Appeals) gave part relief, which was upheld by the Tribunal. The Revenue went in appeal against the said order of the Tribunal before the hon'ble High Court. The hon'ble High Court admitted the appeal and after passing a detailed order dismissed the appeal on December 23, 2011 after answering the questions of law against the Revenue. In the meanwhile, vide order dated April 27, 2007, the Assessing Officer levied penalty under section271(1)(c) of the Act at Rs. 18,02,291 at 100 per cent. on the tax of Rs. 18,02,291 sought to be evaded.
The learned Commissioner of Income-tax (Appeals) has deleted the penalty, which has been questioned by the Revenue authorities before us.
4. In support of the ground, the learned senior Departmental representative, Shri Rajesh Kumar has placed reliance on the penalty order with this submission that the assessee tried to evade payment of tax by not filing its return of income. It had filed its return of income only in compliance with the notices issued under section 142(1) of the Act. The Assessing Officer was thus justified in initiating and imposing the penalty as the assessee has furnished inaccurate particulars of its income by claiming that income derived by it from supply of network equipment to Indian customers qualifies as "business profits" and therefore not liable to taxation in India under the provisions of article 7(1) of Tax Treaty in the absence of a "permanent establishment" of the assessee in India.
5. The learned authorised representative Shri Sanat Kapoor, advocate, with Ms. Ananya Kapoor, advocate, has on the other hand, reiterated the submission made before the authorities below and placed reliance on the decisions cited before them.
6. We have already discussed facts of the case hereinabove to paragraph Nos. 3 and 3.1 which we are not repeating here. It is an well-established proposition of law that being penal in nature, the provisions of section 271(1)(c) of the Act are invoked only when there is evidence beyond doubt that there was concealment of particulars of income or furnishing inaccurate particulars thereof on the part of the assessee towards the tax alleged to be evaded. That is the reason behind that assessment proceedings and penalty proceedings are independent proceedings. In other words, making and sustaining an addition against the assessee will not always be resulted into levy of penalty. When we examine the facts of the present case, keeping in mind the above position of law, we find that the learned Commissioner of Income-tax (Appeals) has deleted the penalty mainly on the basis that the explanation furnished by the assessee regarding non-filing of its return of income was bona fide. Where an explanation is furnished which the assessee is unable to substantiate, but the assessee establishes that the explanation furnished was bona fide and all the facts relating to the same and material to the computation of its total income has been disclosed by it, in our view, Explanation 1B to section 271(1)(c) of the Act will not be applicable. In the present case before us the explanation of the assessee was that being a tax resident of UK it had opted to be taxed in India under the provisions of the India-UK Double Taxation Avoidance Agreement (Tax Treaty) for the previous year relevant to the assessment year under consideration. It was explained that under the provisions of the Tax Treaty, income derived by it from supply of network equipment to Indian customers qualify as "business profits" and, therefore, not liable to taxation in India under the provisions of article 7(1) of the Tax Treaty in the absence of a permanent establishment of the assessee in India. Thus, the assessee did not offer the revenue from supply of network equipment to tax in India. It was a debatable issue hence failure to voluntarily file return of income under the above bona fide belief cannot be construed to be concealment of income and furnishing inaccurate particulars of income by the taxpayer. Also because the learned Commissioner of Income-tax (Appeals) and the Tribunal upheld the taxability of the assessee in India partially cannot lead to an inference that the assessee had furnished inaccurate particulars of income. It is not the case of the Revenue that the assessee had not disclosed all the material facts but it is a case where the Revenue did not agree with the assessee that it was not liable to taxation in India. Penalty can be levied on account of failure on the part of the assessee to offer explanations with regard to facts material to the computation of total income and where no explanations have been offered by the assessee or were found by the Revenue authorities to be false. There is no such case before us. Under these facts and circumstances considered in its totality, we are of the view that the learned Commissioner of Income-tax (Appeals) was justified in deleting the penalty in question. The same is upheld. The ground is accordingly rejected.
7. In the result the appeal is dismissed.
The order pronounced in the open court on April 28, 2017.