NATIONAL COOPERATIVE DEVELOPMENT CORPORATION,NEW DELHI vs. DCIT, CIRCLE- 17(2), NEW DELHI

Per Anadee Nath Misshra, AM

(A) This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-37, New Delhi, [“Ld. CIT(A)”, for short], dated 25.05.2017 for

Assessment Year 2013-14. Ground taken in this appeal of Assessee is as under:

“1. The CIT(A) has erred on facts and in law in upholding the order of the AO for disallowing bank guarantee charges of Rs. 10,58,963/- by invoking the provision of Section 40(a)(ia) of Income Tax Act. The appellant contends that the payment of bank guarantee charges to scheduled bank is not covered under any TDS provisions. Hence, the addition should be deleted.”

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ITA No.-4309/Del/2017. National Cooperative Development Corporation. (B) The limited issue in this appeal is whether the disallowance of Bank Guarantee

Charges by the Assessing Officer (“AO”, for short) under Section 40a(ia) of Income Tax

Act, 1961 (“I.T. Act”, for short) is correct. Vide Assessment Order dated 22.03.2016

under Section 143(3) of I.T. Act, AO had disallowed the amount of Rs. 10,58,963/-

under Section 40a(ia) of I.T. Act holding that the assessee, although required to deduct

TDS, had failed to deduct tax at source. Aggrieved, the assessee filed an appeal

before the learned Commissioner of Income Tax (Appeals)-37, New Delhi. Vide order

dated 25.05.2017, the Ld. CIT(A) upheld this addition, holding as under:

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ITA No.-4309/Del/2017. National Cooperative Development Corporation.

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ITA No.-4309/Del/2017. National Cooperative Development Corporation.

(B.1) Aggrieved again, the assessee has filed this present appeal in Income Tax

Appellate Tribunal (“ITAT”, for short). At the time of hearing before us, the Learned

Authorized Representative (“AR”, for short) of the assessee submitted that the dispute

regarding applicability of Section 40a(ia) of I.T. Act in respect of Bank Guarantee Fees

came up before ITAT, in assessee’s own case, for Assessment Year 2011-12 in ITA No.-

4193/Del/2014, and vide order dated 31.05.2017 of Co-ordinate Bench of ITAT, Delhi,

the issue was decided in favour of the assessee. The relevant portion of the aforesaid

order dated 31.05.2017 of Co-ordinate Bench of ITAT, Delhi is reproduced as under:

” 3. During the assessment proceedings Ld. AO observed that assessee had claimed guarantee .fee on borrowings as deductible expenditure. It was observed that this amount has been paid by assessee to Canara Bank during assessment year under consideration. Ld. AO. asked assessee to explain as to why guarantee fee of Rs. 18,69,*613/- may not be disallowed, as no TDS has been deducted on the same. Ld. AO placed * reliance on CBDT notification No: 56/2012, to reach to the conclusion that certain specified payments such as payment to institution, Association or body or class of institution, associations or bodies as may be notified by Central . ’Government in the official Gazette, was not required to deduct TDS from 01.01.2013. Ld. AO was of opinion that as this particular' payment in the present case of assessee pertained prior to 01.01.2013, assessee was liable to deduct TDS. Ld. AO therefore, added back amount paid by assessee under section 40(a) (ia) of the Act. 4. Aggrieved by order of Ld. AO, assessee preferred an appeal before Ld. CIT (A) Page 4 of 14

ITA No.-4309/Del/2017. National Cooperative Development Corporation. who confirmed addition made by Ld. AO.

“197A. …….(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.”

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ITA No.-4309/Del/2017. National Cooperative Development Corporation. SECTION 197A OF THE INCOME-TAX ACT, 1961- DEDUCTION OF TAX AT SOURCE - NO DEDUCTION IN CERTAIN CASES. UNDER SECTION 197A(1F) NOTIFICATION NO. 56/2012 [F. NO. 275/53/2012-IT(B)]} DATED 31-12- 2012.

In 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. .

ITA No.-4309/Del/2017. National Cooperative Development Corporation. 10. To our understanding guarantee. fees paid will not fall within ambit of “interest”,, under section 2(28 A) of the Act. There also does not arise any kind of principal-agent relationship between assessee and bank and therefore, guarantee fees received by bank cannot even be reckoned as commission or brokerage for that matter. The bank is also not acting on behalf of assessee for rendering any kind Of service. We agree with submissions advanced by Ld. AR that „ guarantee, fee paid by assessee to bank do not fit into any of taxing provisions or under section 2(28A) for TDS provisions to be applicable. 11. Under such circumstances we do not find any reason to interpret circular in the manner as it has been submitted by Ld. Sr. DR. It is cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. But the rule in general I applicable where object of statute is or to impose new burdens or to impair existing obligations. If there are words in statute sufficient to show intention of legislature to affect existing rights of tax payer, it is deemed to be prospective in nature. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, therefore, nature of the Act, regard must be had to substance rather than to form. If a. new Act is "to explain" an earlier Act, it would be construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to meaning- of the previous Act. It is well settled that if a statute is curative or merely declaratory of previous law retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect,

Hon’ble Mumbai Tribunal in; case of Neo Sports Broadcast Pvt. Ltd Vs.CIT.TDS reported in 181 TTJ 417 has held as under:

“Section 194A(1) is' applicable only to "income by way of interest". However, the impugned transaction is that of reimbursement of bank guarantee commission and does not involve payment of interest. There is no borrowing whatsoever. "Interest" as per sec. 2(28A) means "interest payable ... in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation)) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred ... "In the case of CIT v. Cargill Global Trading (I.) Co.. (P.) Ltd. [2011] 335 ITR 94/199 Taxman 320 (Delhi), Hon'ble Delhi High Court held as under:-

"It is clear from the provisions of section 2(28A) that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. In the instant case, on the aforesaid facts appearing On record, the Tribunal rightly held that the discounting charges paid were not in Page 7 of 14

ITA No.-4309/Del/2017. National Cooperative Development Corporation. respect of any debt incurred or money borrowed, instead, the assessee had merely discounted the sale consideration respectively on sale of goods."

In the instant case, there is no money borrowed or debt incurred. Therefore, provisions of sec. 2(28A) and sec. 194A do not apply. Payment made to NCL is not "income by way of interest". The impugned receipt would be in the nature of reimbursement of expenses incurred by it In view of the above discussion, we do not find any merit in the order passed u/ s.263 in respect of one of the possible view taken by the AO. Even on merit, we found that bank guarantee commission does not come under the purview of interest so as to make assessee liable for TDS u/ s. 194A.”

Ld. AR had placed reliance upon decision of Mumbai Bench in case of Kotak Securities Ltd Vs. DCIT, reported in 147 TTJ 443 has held as under:

“5. A plain reading of the above provision indicates that tax withholding requirements, under section. 194H apply in respect of 'commission or brokerage', which, in turn, is defined by Explanation to Section 194H. No doubt, this definition is inclusive but the fundamental question that we-really need to consider in the first place is as to what are the connotations of expression ' commission or brokerage1 in common parlance, and then proceed to deal with the inclusions thereto by the virtue of specific provision of law. 6. We find that the expression ’ commission and ’brokerage1 have been used together in the statute. It is well settled, as noted, by Maxwell in Interpretation of elaborating on the principle of noscitur a socus, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. Explaining this principle in general terms, Hon'ble Shri M.K. Chaturvedi, the then Vice President (MZ) has, interpretation of Taxing Statutes (AIFTP Journal : Vol. 4, No. 7, July, 2002, at p. 7), in his inimitable words' observed:

Law is not a brooding .omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common-sense .approach. Suppose a man tells his wife to go out and buy bread, milk or anything else she needs, he will not normally be understood to include in the terms 'anything else she needs' a new car or an item of jewellery. The dictum of ejusdem generis refers to similar situation. It means of the same kind, class or nature. The rule is that when general words follow particular Page 8 of 14

ITA No.-4309/Del/2017. National Cooperative Development Corporation. and specific words of the same nature, the general words must be confined to the things of same kind as specified. Noscitur a sociis is a broader version of the maxim ejusdem generis. A man may be known by the company he keeps and a word may be interpreted with reference to be accompanying 'words. Words derive colour from the surrounding words.

ITA No.-4309/Del/2017. National Cooperative Development Corporation. 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 soles or business transactions etc. The inclusive definition of the expression ' commission or brokerage' in Explanation to Section 194H 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 1 commission or brokerage1. In the case of South Gujarat Roofing Tiles Manufacturers Association v. 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 194H, 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 v. Asstt. CIT [2011] 16 taxmann.com 343 (Delhi - Trib.), Foster's India (P.) Ltd. v. ITO [2009] 29 SOT 32 (Pune) (URO), and Ajmer Zila Dugdh Uipadak Sangh.Ltd. v. ITO 12009} 34 SOT 216, principal agent relationship is a sine qua non for invoking the provisions of Section 194H. 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 'hank 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. Page 10 of 14

ITA No.-4309/Del/2017. National Cooperative Development Corporation. This transaction, in our considered, view, is not a transaction between principal and agent so as to attract the tax deduction requirement 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 194H from payments made by the assessee to various banks. ”

(B.2) The Ld. Authorized Representative of the assessee further submitted that as far

as applicability of Section 194J of I.T. Act is concerned, the issue stands covered in

favour of the assessee by order of Hon’ble Supreme Court in the case of CIT vs. Kotak

Securities Ltd. [2016] 383 ITR 1 (SC). Placing reliance on the aforesaid precedents,

vide order dated 31.05.2017 of Co-ordinate Bench of ITAT, Delhi in assessee’s own

case; and order in the case of CIT vs. Kotak Securities Ltd. (supra); the Ld. AR of the

assessee submitted that the aforesaid disallowance of Rs. 10,58,963/- under Section

40a(ia) of I.T. Act should be deleted. The Ld. Departmental Representative (“Ld. DR”,

for short) however, drew our attention to paragraphs 5.1 and 5.2 of the aforesaid

impugned appellate order dated 25.05.2017 of the Ld. CIT(A) and supported the order

of the Ld. CIT(A). In rejoinder, the Ld. AR of the assessee submitted that the contents

of the paragraphs 5.1 and 5.2 of the impugned appellate order dated 25.05.2017 of the

Ld. CIT(A) have no basis. He further submitted that the facts stated in these

paragraphs of the order of the Ld. CIT(A) have no relevance or application in the case

of the assessee. He further submitted that the assessee had never sought any

technical services from the Bank and further that the Bank had never provided any

technical services to the assessee by way of any record etc. He also submitted that

applicability of Section 194J of I.T. Act was not even alleged by the AO and the Ld.

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ITA No.-4309/Del/2017. National Cooperative Development Corporation. CIT(A) has invoked Section 194J of I.T. Act without any consideration of the facts and

circumstances of assessee’s case.

(C) We have heard both sides. We have also perused the materials available on

record. We find that nowhere, it is the case of the AO that Section 194J of I.T. Act is

applicable in the case of the assessee. We also find that there is nothing on record to

show that the assessee actually sought any technical services from Bank or that the

Bank actually provided any technical services to the assessee or that the aforesaid

payment of Rs. 10,58,963/- was made by the assessee to the Bank as fees for technical

services. Thus, we are of the view that the finding of the Ld. CIT(A) that the payment

of Rs. 10,58,963/- was made by the assessee to the Bank on account of technical

services; is without any basis and without any supporting materials. Therefore, the

conclusion of Ld. CIT(A), arrived at without any basis and without any supporting

materials, cannot be upheld. In view of the foregoing, and respectfully following the

precedents, vide order dated 31.05.2017 of Co-ordinate Bench of ITAT in assessee’s

own case in ITA No. 4193/Del/2014 for Assessment Year 2011-12, Delhi and order of

Hon’ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. (Supra); and

moreover, as neither side has brought any facts and circumstances for our

consideration to distinguish the present appeal before us from facts and circumstances

relevant for aforesaid orders, i.e. order dated 31.05.2017 of ITAT in assessee’s own

case and in the case of CIT vs. Kotak Securities Ltd. (supra); we decide the disputed

issue in the present appeal before us in favour of the assessee, and set aside the order

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ITA No.-4309/Del/2017. National Cooperative Development Corporation. of the Ld. CIT(A). The AO is accordingly directed to delete the aforesaid addition of Rs.

10,58,963/-.

(D) In the result, appeal filed by assessee is allowed.

Order pronounced in the Open Court on 4/12/2019.

Sd/- Sd/- (H.S. SIDHU) (ANADEE NATH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 4/12/2019. Pooja/-