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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’ NEW DELHI
Before: SHRI O.P. KANT & SHRI AMARJIT SINGH
ORDER PER O.P. KANT, AM:
This appeal by the assessee is directed against order dated 16/08/2017 passed by the learned Commissioner of Income-tax (Appeals)-6, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2013-14, raising following grounds:
1. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)
6. New Delhi erred in law in upholding the order of the learned Assessing Officer and in sustaining the disallowance of Rs.4,74,531 made in terms of the provisions contained in section 40(a)(ia) of the Income tax Act, 1961 with respect to bank guarantee fee / commission paid by the assessee company.
2. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)-6, New Delhi erred in law in upholding the order of the learned Assessing Officer and in sustaining the disallowance of Rs. 4,74,531 made in terms of the provisions contained in section 40(a)(ia) of the Act without specifying the section under which tax was required to be deducted at source under Chapter XVII-B of the Income tax Act, 1961.
2. Briefly stated facts of the case are that the assessee was engaged in transport of goods. For the year under consideration, the assessee filed return of income on 19/09/2013, declaring total income of ₹ 9,82,18,720/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. During scrutiny proceedings, the Assessing Officer observed payment of ₹ 4,74,531/- by the assessee to the bank as bank guarantee fee/commission. According to the Assessing Officer, this payment was liable for deduction of tax at source and assessee did not deduct any tax at source and, therefore, expenses on bank guarantee fee/commission debited in profit and loss account were liable for disallowance in terms of section 40(a)(ia) of the Act. The assessee referred to CBDT Notification No. 56/2012, dated 31/12/2012 and submitted that according to the notification TDS was not deductible on payment of bank guarantee (BG)/commission. The Learned Assessing Officer rejected the contention of the assessee and held that said notification came into effect from 01/01/2013 whereas the payment has been made prior to this date and, therefore, assessee is not covered by the above notification. The Assessing Officer, accordingly, made the addition of ₹ 4,74,531/- in the impugned order dated 11/03/2016 passed in terms of section 143(3) of the Act. On further appeal, the Ld. CIT(A) upheld the disallowance. Aggrieved, the assessee is before the Tribunal by way of raising the grounds as reproduced above.
3. Before us, both the parties appeared through Video Conferencing facility and filed documents through email. 4. In both the grounds, the sole issue is disallowance of bank guarantee fee/commission in terms of section 40(a)(ia) of the Act. 5. Before us, the learned counsel of the assessee submitted that the Assessing Officer has not specified the relevant section under which bank guarantee fee/commission was liable for deduction of tax at source. He further submitted that issue in dispute is covered in favour of the assessee by the decision of the Tribunal, Mumbai Bench, the case of Kotak Securities Ltd. Vs DCIT, (2012) 14 ITR (T) 495. 6. On the contrary, Learned DR relied on the order of the lower authorities and submitted that prior to notification (supra), bank guarantee fee/commission was liable for deduction of tax at source for payments made to both domestic as well as foreign bank, however, by way of the notification (supra) with effect from 01/01/2013 bank guarantee commission paid to bank listed in the second schedule to the reserve bank of India has been exempted from deduction of tax at source. According to him, payments made to foreign bank or bank guarantee fee/commission is still liable to deduction of tax at source.
Therefore, no immunity can be granted to the assessee under the notification (supra) for the period prior to 01.01.2013.
We have heard rival submission of the parties and perused the relevant material on record. In the assessment order, the Assessing Officer has noted that bank guarantee fee/commission are not covered within the definition of the interest under section 2(28A) of the Act and, therefore, exemption provided under section 194A(3)(iii) is not applicable in the case of the assessee. Though the Assessing Officer has not specified the relevant section under which the tax was to be deducted, he held the payment for bank guarantee services is not covered by the CBDT notification (supra) and made disallowance under section 40(a)(ia) for non-deduction of tax at source. The Ld. CIT(A) upheld the disallowance observing as under:
3.1.3. The facts of the case and the submissions of the appellant have been carefully considered. The AO disallowed bank guarantee commission/charges amounting to Rs.4,74,531/- under section 40(a)(ia) of the Act for non deduction of tax from such payment. For disallowing the same, the AO relied upon the Notification no. 56/2012 dated 31.12.2012 issued under section 197A (IF) of the Act. Sub-section (IF) which was inserted in section 197A of the Act vide Finance Act, 2012 with effect from 1st July, 2012 provides as under:-
(1F) Notwithstanding anything contained in this Chapter, no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf."
After the enactment of Finance Act, 2012, a Supplementary Memorandum explaining the official amendments to the Finance Bill, 2012 was issued vide Circular no. 3/2012, dated 12-6-2012 :h inter alia explained the insertion of sub-section (IF) in section 197A of the Act as under:-
"Under the existing provisions of Chapter XVII-B of the Act, tax is required to be deducted (TDS) from certain payments. There are situations where collection of tax by way of TDS may cause genuine hardship to the deductee. In order to reduce the hardship and compliance burden in these cases, it has been provided that no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette.
This amendment will take effect from 1st July, 2012."
Subsequently, the Central Government vide Notification no. 56/2012 dated 31.12.2012 issued under section 197A(1F) of the Act notified that tax shall not be deducted under Chapter XVII of the Act from the specified payments made to a bank (other than a foreign bank) listed in the Second Schedule to the Reserve Bank of India Act, 1934. The said Notification no. 56/2012 dated 31.12.2012 issued from F. no. 275/53/2012-IT(B) is as under:-
"ln exercise of the powers conferred by sub-section (IF) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax under Chapter XVII of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, namely:-
(i) bank guarantee commission; (ii) cash management service charges; (iii) depository charges on maintenance of DEMAT accounts; (iv) charges for warehousing services for commodities; (v) underwriting service charges; (vi) clearing charges (MICR charges);
(vii) credit card or debit card commission for transaction between the merchant establishment and acquirer bank.
This notification shall come into force from the 1st day of January, 2013."
A plain reading of section 197A(1F) of the Act read with Memorandum explaining the official amendments to the Finance Bill, 2012 indicates that the Central Government under section 197A(1F) of the Act is empowered to provide exemption from deduction of tax to the payments from which tax is deductible under Chapter XVII of the Act. Therefore, under section 197A (IF) of the Act, the Central Government can notify only those payments from which the tax is deductible under Chapter XVII of the Act. Hence, the scheme of notification of payments under section 197A (IF) of the Act presupposes that a payment which has been notified under this sub-section was not exempt from deduction of tax before the date of notification of such payment. As the tax was deductible from such payment, the Central Government notified such payments for reducing the hardship and compliance burden in these cases. Therefore, the power of notification under section 197A (If) is not applicable for those payments from which tax is not deductible under Chapter XVII of the Act. There is no dispute that the Central Government under section 197A(1F) of the Act has notified certain payments made to a bank (other than a foreign bank) listed in the Second Schedule to the Reserve Bank of India Act, 1934 vide Notification no. 56/2012 dated 31.12.2012. This notification inter alia contains payments in the nature of bank guarantee commission and the Notification is effective from 1st January, Therefore, the issue of Notification under section 197A(1F) of the Act inter alia providing tax under Chapter XVII shall not be deducted from payments in the nature of bank guarantee to specified banks makes it obvious that the tax is required to be deducted under Chapter XVII of the Act from the payments in the nature of bank guarantee commission, however, such payments made to the specified banks with effect from 1st January, 2013 shall not be liable for tax deduction in view of the Notification issued under section 197A(1F) of the Act. Further, the Notification also made it apparent that the payments specified in the Notification including the payment in the nature of bank guarantee commission paid to a domestic bank other than the bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 shall be liable for tax deduction even after 1st January, 2013 as the same is not covered under the Notification. The appellant's case relates to AY 2013-14 (Previous Year 2012- 13) i.e. partly before the date of coming into force of the said Notification, hence the tax was required to be deducted from the said payment as the payment for the period upto 31.12.2012 was made before the date of coming into force of the Notification.
The appellant has relied upon, among others, the judgment of Kotak Securities Ltd. vs DCIT 73DTR (Mumbai)(Trib). It is noticed that the judgments relied on by the appellant were either pronounced before the issue of Notification no. 56/2012 dated 31.12.2012 or are on a different footing. As discussed earlier, the Notification no. 56/2012 dated 31.12.2012 made it apparent that tax is required to be deducted under Chapter XVII of the Act from the payments mentioned in the Notification including payment in the nature of bank guarantee commission, however, such payments made to the specified banks with effect from 1st January, 2013 shall not be liable for tax deduction in view of the Notification issued under section 197A(1F) of the Act. Hence, the judgments relied on by the appellant would not be of any assistance to the appellant in the changed circumstances. Further, the Notification has not clarified that tax is not deductible from the payment in the nature of bank guarantee commission, as mentioned by the appellant, rather as discussed earlier, it inter alia provided that the tax is deductible from the payments in the nature of bank guarantee, however, if such payments are made to the banks specified in the Notification on or after 1st January, 2013, the tax is not be deducted in view of the exemption granted in the Notification. Besides, though the appellant has sought relief under the second proviso to section 40(a)(ia), it failed to furnish any evidence of the recipient bank having filed the relevant IT Return.
From the discussion in the preceding paragraphs, it is apparent that tax was required to be deducted from the payment of bank guarantee commission/charges amounting to Rs.4,74,531/- during the Previous Year 2011-12 and as the tax was not deducted, the same is not allowable in view of the provisions of section 40(a)(ia) of the Act and hence the disallowance of Rs.4,74,531/- made by the AO is hereby confirmed.”
7.1 However, we find that Tribunal Delhi Bench in the case of Navnirman Highway Project Private Limited Vs DCIT, in has held that bank guarantee fee/commission paid before 01/01/2013 is not liable for deduction of tax at source in view of no principal agent relationship between the assessee and the bank. The relevant finding of the Tribunal (supra) is reproduced as under:
“5. Ld. AR for the assessee by relying upon the order passed by the coordinate Bench of the Tribunal in case cited as Kotak Securities Ltd. vs. DCIT, TDS Circle 2 (1), Mumbai – (2012) 14 ITR (T) 495 (Mumbai-Trib.) contended that bank guarantee commission partakes character of interest u/s 2(28A) of the Act and as such, addition is not liable to be sustained. However, on the other hand, ld. DR for the Revenue relied upon the order passed by the ld. CIT (A) but has not controverted the decision rendered by the coordinate Bench of the Tribunal by bringing on record any other decision contrary to it.
Coordinate Bench of the Tribunal decided the identical issue in favour of the assessee by returning following findings :-
“9. In the light of the above discussions, and when we look at the connotations of expression ‘commission or brokerage’ in its cognate sense, as in the light of the principle of noscitur a sociis as we are obliged to, in our considered view, scope of expression ‘commission’, for this purpose, will be confined to ‘an allowance, recompense or reward made to agents, factors and brokers and others for effecting sales and carrying out business transactions’ and shall not extend to the payments, such as ‘bank guarantee commission’, which are in the nature of fees for services rendered or product offered by the recipient of such payments on principal to principal basis. Even when an expression is statutorily defined under section 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act ( i.e. Income Tax Act), unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the Income Tax Act must depend on the context in which the expression in set out, and the context in which expression ‘commission’ appears in section 194H, i.e. alongwith the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to, as has been elaborated above, a payment in the nature of reward for effecting sales or business transactions etc. The inclusive definition of the expression ‘commission or brokerage’ in Explanation to Section 194 H is quite in harmony with this approach as it only provides that “any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities” is includible in the scope of meaning of ‘commission or brokerage’. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. In the case of South Gujarat Roofing Tiles Manufacturers Association Vs State of Gujarat [(1976) 4 SCC 601], Hon’ble Supreme Court were in seisin of a situation in which an expression, namely ‘processing’, was given an inclusive definition, but Their Lordships were of the view that “there could be no other meaning of ‘processing’ besides what is stated as included in that expression” and that “Though ‘include’ is generally used in interpretation clause as a word of enlargement, in some cases context might suggest a different intention’. Their Lordships then concluded that though the expression used in the definition clause is ‘includes’, “it seems to us that the word ‘includes’ has been used here in the same sense of ‘means’; this is the only construction that the word can bear in this context”. In other words, an inclusive definition, as Their Lordships noted, does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, in our considered view, even an inclusive definition has to be treated as exhaustive. That is the situation in the case before us as well. Even as definition of expression ‘commission or brokerage’, in Explanation to Section 194 H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition. Therefore, as held by the coordinate benches in a number of cases including SRL Ranbaxy Ltd vs ACIT (ITA No. 434/Del/11; order dated 16.12.2011), Fosters India Ltd Vs ITO (117 TTJ 346), and Ajmer Zila DugdhUtpadak Sangh Ltd Vs ITO (34 SOT 216), principal agent relationship is a sine qua non for invoking the provisions of Section 194 H. In the case before us, there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’. While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, is not a transaction between principal and agent so as to attract the tax deduction requirements under section 194H. We are, therefore, of the considered view that the CIT(A) indeed erred in holding that the assessee was indeed under an obligation to deduct tax at source under section 194 H from payments made by the assessee to various banks. As we have held that the assessee was not required to deduct tax at source under section 194 H, the question of levy of interest under section 201(1A) cannot arise.
In view of the above discussions, we quash the impugned demands under section 201(1) and 201(1A) r.w.s. 194 H . We, therefore, also see no need to deal with other peripheral legal issues raised by the assessee.”
7. So, following the decision rendered by the coordinate Bench of the Tribunal, when the bank has issued bank guarantee on behalf of the assessee there is no principal – agent relationship between the bank and the assessee which is a mandatory condition for invoking the provisions contained u/s 194H and in these circumstances, the assessee was not liable to deduct tax at source u/s 194H from payment of bank guarantee commission to the bank. Moreover, bank guarantee commission also partakes the character of interest u/s 2(28A) of the Act and as such, exemption provided u/s 194A(3)(iii) is available to the assessee qua such payment. So, we are of the considered view that the ld. CIT (A) has erred in not following the decision rendered by the coordinate Bench of the Tribunal in Kotak Securities Ltd. (supra) on the ground that the decision of Kotak Securities Ltd. (supra) is not applicable having been pronounced before the issue of Notification No.56/20 12 dated 3 1.12.2012 because ordinarily any provision of the statute has to be read having prospective effect and not having retrospective effect unless it is specifically provided. So, when there is no principal – agent relationship between the bank and the assessee, deduction of tax at source on commission or brokerage is not required for. Consequently, addition made by the AO and confirmed by the ld. CIT (A) is ordered to be deleted, thus the appeal filed by the assessee is hereby allowed.”
7.2 Respectfully, following finding of the Tribunal (supra), we hold that the assessee was not liable for deduction of tax at source on the bank guarantee fee/commission during the relevant period in absence of any principal agent relationship between the assessee and the bank. Accordingly, we direct the Assessing Officer to delete the addition. The grounds of appeal of the assessee are accordingly allowed.
8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 23rd September, 2021