The TDS officer held us in default under s.201 for not deducting and for deducting under the wrong section, and now a s.271C notice proposes a penalty equal to the entire tax - what actually has to be answered?
The client is a company running two diagnostic laboratories in Hyderabad. For FY 2022-23 three items are in issue. It paid Rs 2,40,00,000 to a manpower vendor and deducted nothing, because the vendor's invoices billed the deputed technicians' salary and statutory dues separately, at cost, with a service fee shown as a distinct line on which tax was deducted. It paid Rs 1,80,00,000 for annual maintenance of imaging equipment and deducted two per cent under s.194C where the officer says ten per cent under s.194J was due. And it deducted Rs 14,60,000 in the quarter ending December 2022 and deposited it on 17 May 2023, five months late, with interest. An order under s.201(1) and s.201(1A) dated 26 September 2024 raised Rs 42,00,000 of tax and Rs 11,30,000 of interest. The appeal to the Commissioner (Appeals) was filed on 22 October 2024 and is still pending. The order sheet records a reference by the Assessing Officer to the Additional Commissioner on 11 October 2024. Nothing further happened until a show-cause notice under s.274 read with s.271C, dated 3 August 2026, proposed a penalty of Rs 56,60,000 - the whole tax on all three items. The reply is due on 20 September 2026. Two of the three vendors have given the accountant's certificate showing they returned the income and paid the tax; the third has closed down and will not.
Split the notice into its three items before drafting a word, because they do not share a defence and one of them is not a s.271C case at all. Then get the date of the reference to the Additional Commissioner on the record in writing, by letter to the officer quoting the order sheet entry, because on one High Court's reading that date and not the show-cause notice starts the limitation clock, and if it does the whole penalty is out of time. A reply that opens on whether maintenance is technical service concedes the two points - the limb and the limitation - that could end the proceeding without any factual contest.
Section 271C(1)(a) is attracted by a failure to deduct, not by late payment of tax that was in fact deducted. The Supreme Court has held exactly that - deducting and paying late does not attract the penalty, although interest under s.201(1A) still runs and prosecution under s.276B remains available, so it is not an amnesty. On these facts the Rs 14,60,000 was deducted and paid, so that item has no place in a s.271C notice and the reply should say so in the first paragraph. The client should be told in the same breath that the risk on that item is criminal rather than pecuniary: the Supreme Court has held that the s.276B offence is complete once deducted tax is not credited within the prescribed time, and that depositing it later with interest does not wipe out the default.
Do not run the argument that deducting something is not failing to deduct. Both non-deduction and short deduction are failures to deduct and both make the payer an assessee in default under s.201(1), but only to the extent of the shortfall - so on the maintenance payments the penalty base is the eight per cent difference, not the ten per cent, and not the gross payment. The distinction still does work elsewhere: a High Court has held that s.40(a)(ia) does not reach short deduction at all, and another has held that where tax has been short deducted the correct course open to the officer is s.201 and not a disallowance - which matters because the same officer's colleague may be proposing a thirty per cent disallowance in the company's own assessment. There is contrary authority: one High Court holds that deducting under an inapplicable section is not deduction as required by Chapter XVII-B, so the shortfall is treated as a failure to deduct and the disallowance applies.
On the first item, a pure reimbursement carries no income in the recipient's hands, so there is nothing to deduct on under s.194C at all - a Tribunal bench so held where the expenses were separately billed with no profit or service element added, which is the shape of these invoices. On the second, the line between the two sections is what the payee supplied: an outcome produced under a contract for work, or professional or technical expertise directed at the payer's particular requirement. Courts have held that a standard, automated facility available to anyone on payment of the prescribed fee is not a technical service rendered to the payer whatever equipment is involved; that transaction charges for a trading platform available to every member on identical terms are not fees for technical services; that erection and commissioning does not become a technical service merely because the contractor deploys technical personnel; and that testing and commissioning forming part of an indivisible contract cannot be carved out to create a fees-for-technical-services component.
Section 273B bars the penalty where the person proves reasonable cause, and the burden is on the assessee, not on the officer to disprove it. The Supreme Court has upheld a penal cash provision because s.273B mitigates its hardship. An honest but wrong view of the law is capable of being reasonable cause: a Tribunal bench upheld deletion of a collection penalty where the dealer honestly believed his goods were not scrap; a High Court has treated bona fide belief with a genuine transaction as reasonable cause; another has held that sufficient cause is a question of fact. The Supreme Court has said penalty is not to be imposed merely because it is lawful to do so, and not at all for a technical or venial breach or a bona fide belief. In the withholding context the library's own note records that good faith answers a s.271C penalty far better than it answers the demand and the interest - and the Supreme Court, on an honest salary estimate, said it answers the penalty, not the tax and not the interest.
The first proviso to s.201(1) takes the payer out of assessee-in-default status where the resident payee has filed a return, taken the sum into account in it and paid the tax due, certified by an accountant in the prescribed form. The Supreme Court has held that the tax cannot be recovered twice - once the payee has paid, the deductor is not liable for the tax again, though interest may still run for the period of delay - and a Tribunal bench has fixed the end of that period as the date the payee furnished his return, not the date the payer eventually pays. So for two of the three vendors the s.201(1) demand should go and the interest should be recomputed to their return dates. A High Court has also held that s.201 by itself confers no power on an income-tax authority to demand the tax from a person who failed to deduct.
For a penalty of this kind the operative limb of s.275(1)(c) gives the later of two periods: the end of the financial year in which the proceedings in the course of which the penalty action was initiated are completed, and six months from the end of the month in which the action for imposition of penalty is initiated. A High Court has held that the expression 'action for the imposition of penalty is initiated' refers to the date of the first introductory step, and that the Assessing Officer's reference to the Joint Commissioner is that step - not the show-cause notice that follows it. On these dates the s.201 proceedings were completed on 26 September 2024, so the financial-year limb closed on 31 March 2025; the reference was made on 11 October 2024, so the six-month limb closed on 30 April 2025. The later of the two was 30 April 2025, and a show-cause notice issued on 3 August 2026 is more than a year outside it.
The penalty is charged on a sum the officer says should have been deducted, and that sum is the very thing under appeal - if the Commissioner (Appeals) holds that s.194J did not apply or that the manpower billing carried no income, there is no failure left for the penalty to attach to. A High Court has held that an order under s.201 stands or falls on the section the officer actually invoked, and refused the Revenue a remand to apply a different section on appeal, which is the same point from the other end: the penalty cannot be sustained on a basis the s.201 order never took. In practice the two do travel together - a High Court, finding a strong prima facie case against a s.201 order, stayed the order, the demand and the s.271C penalty notice in the same breath.
The three consequences are separate and cumulative and clients routinely see only the first. The tax under s.201(1) goes if the payees have paid; the interest under s.201(1A) does not go with it, running at one per cent a month where there was a failure to deduct and one and a half where tax was deducted and paid late, and it is compensatory, so there is no waiver. The penalty is a separate sum equal to the tax not deducted. And in the company's own assessment for the year, thirty per cent of the sums on which no tax was deducted is liable to be disallowed, coming back only in the year the tax is paid or on the second proviso where the payee has paid and the certificate is furnished. Set out all four numbers and the limitation point beside them, because the client's decision changes when the penalty is the only live head.
The deducted-and-paid-late item drops out at the reply stage in most of these, because the Supreme Court's holding on the limb is clean. The characterisation items survive to the Commissioner (Appeals) and are usually decided there along with the s.201 appeal, and when the s.201 order goes the penalty goes with it as a matter of course rather than by any separate reasoning. Where the s.201 order is upheld, reasonable cause is what decides the penalty, and it succeeds far more often where a written opinion or a vendor agreement predates the payments than where the belief is asserted for the first time in the reply. Limitation is the point that ends the whole proceeding without any of this - and it is also the point most often lost, because the reference date is on an order sheet nobody asked for in time.
