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(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.”
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:
ITA No.-4309/Del/2017. National Cooperative Development Corporation.
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:
”
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.
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.
Aggrieved by order of Ld. CIT (A), assessee is in appeal before us now.
6. Ld. AR submitted that assessee had borrowed term loan from National Scheduled Tribes Finance and Development Corp with condition that assessee would provide bank, guarantee of requisite value. During financial year 2010-11, assessee had paid guarantee fee of Rs. 18,69,61/- to Canara Bank for giving such guarantee. It has been submitted by Ld. AR that assessee claimed these expenses as allowable expenditure. It has also been submitted that such expenses have been allowed as expenditure every year in the income tax assessments even though TDS was not deducted, as the provision were not attracted on payment of guarantee fee to scheduled bank. Was in the nature of expenditure in the hands of assessee. Ld. AR submitted that as there were some ambiguity,' CBDT came with notification No.' 56/2012 clarifying specific payments from’ deduction of TDS, He submitted that said notification is clarificatory issued by CBDT, in terms of provisions of section 197A(1F) which has come into statute by Finance Act 2012, w.e.f. 07.01.2012. He submitted that payment made was not. in the nature of any income or interest in any manner. But it was charges paid to bank for obtaining bank guarantee, which cannot be made exigible to TDS provisions. Ld. AR submitted that expenses incurred by assessee by way of guarantee fee is an allowable expenditure under section 37 (1) of the Act.
We have perused to rival contentions advanced by both sides in the light of records placed before us.
8. This is a case where assessee had obtained term loan from Canara Bank on. condition that assessee would provide bank guarantee of equal amount. Ld. Sr. DR contends that as notification 56/2012 has been inserted w.e.f. 01.01.2013, assessee should have deducted TDS on guarantee fees paid to bank. Whereas Ld. AR Jias, contended that this notification is clarificatory in nature as even prior to release of this notification guarantee fees paid could not have been liable to TDS provisions as it doesn't fit into any of the provisions under section 194 and-do not fall within definition of “interest” . under section 2(28A) of the Act. It has been submitted that sub clause (IF) was inserted to section 197A by Finance Act, 2012 w.e.f. 07.01.2012 which'" granted power to central government to notify that TDS shall not be deducted on certain classes of persons/institutions/bodies on specified payments made to them. The section reads as under:
“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.”
9. The Notification thereafter, subsequently issued under section being 56/2012, for the sake of convenience has been reproduced here with as under:
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. .
This notification shall come into force from the 1st day of January, 2013. Sec. 40(a)(ia) of the Income Tax Act, 1961 emphasis on that expenditure covered under mentioned TDS sections paid to resident and debited Profit & Loss Account will not be allowed as deduction while computing the income under the head “Profit and Gains of Business or Profession”, if:- Tax has not been deducted, at source, b) Tax deducted at source-and the same is not ’ remitted, or c) If expenditure is debited and tax. deducted at source during the previous year, tax is not remitted within the time-limits mentioned in section 200 such expenditure will be allowed as deduction in the year of remittance of the tax. The followinq payments are covered under Section 40(a)(ia): a) Interest U/s 194A b) Commission or brokerage U/s 194H c) Professional or Technical Fee U/s 194J and d) Contractors & Sub Contractors U/s 194C The provisions of the above mentioned TDS sections require that tax has to be deducted at source when amount is paid or credited to the account of the Payee, whichever is earlier. When the amount is credited- to suspense account or any account, by whatever name called, then it is treated as amount credited to the account of the payee and tax has to be deducted at source. Hence, tax has to be deducted at source even on provisions made in the books of account to which TDS provisions are applicable. Page 6 of 14 ITA No.-4309/Del/2017. National Cooperative Development Corporation.
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.
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,
Further this view is supported by the following decisions of coordinate benches of Mumbai Tribunal. The relevant extracts have been reproduced herein below:
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.
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.
7. Broom's Legal Maxims (10th Edn.) observes that "It is a rule laid down by Lord Bacon, that copulatio verborum indicat acceptationem’ in eodem sensu the coupling of words together shows that they are to be understood in the‘same sense."
Let us now deal with legal connotations of these two expressions, namely ' commission ' arid 'brokerage'. The Law Lexicon (Edited by Justice Y.V. Chandrachud; 1997. Edn.) observes that "in commercial law, commission is a compensation to a factor. or other agent for services to be rendered in making a sale or otherwise; a sum allowed as compensation to a servant; factor or agent who manages the affairs of others, in recompense for his services." According to -- the given definition, "It is an allowance, recompense or reward made to agents, factors and brokers and others for effecting sales and carrying out business transactions. It is generally calculated as a certain percentage on the amount of the transactions on the profits to the principal." The expression 'brokerage' is defined as fees or commission given to or charged by a broker'. In turn a broker is defined as "a middleman or agent who, for a commission on the value of transaction, negotiates for others the purchase or sale of books, bonds or commodities, or property of any kind, or, who attends to the - doing of something for another".
In the light of the above discussion, and when we look at the connotations of expression ‘expression of 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 1an 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 lore 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 Page 9 of 14
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.
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 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
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.