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Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: SHRI B.R. BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the revenue against order dated 28/07/2016 passed by the Ld. Commissioner of Income Tax (Appeals)-59, Mumbai, for the assessment year 2012-13, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against assessment order passed u/s 201 (1)/201(1A) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee engaged in the business of Information Technology enabled transaction processing services having two wholly owned subsidiaries in the USA namely First Source Solution Ind. and First Ring Inc. on 17.09.2007 First Source Solution Ind. took loan of USD 275 million from ICICI Bank Ltd., Singapore Branch for acquisition of ‘Med Assist Group’ to acquire 100% common stock of the said group on 20.09.2007 First Ring Inc. acquired 100% common stock of ‘Med Assist Group’ for a consideration of USD 330 million on 03.12.2007 the assessee issued zero 2 Assessment Year: 2012-13 coupon ‘foreign currency convertible bonds’ (FCCB) of USD 275 million with the tenure of five years redeemable on 04.12.2012. The FCCBs were to be redeemed @ 139.37% of the principal amount. As per the terms the FCCB holders had an option to get the bonds converted into equity shares with full voting rights or to redeem the same on or before 04.12.2012. On 25.11.2009, the assessee incorporated First Source Group USA as its wholly owned subsidiaries and First Source Group USA in turn incorporated First Source Business Process Services as its wholly owned subsidiaries in USA. On 31.12.2009, the assessee merged its wholly owned subsidiaries First Ring Inc. with First Business Process Services and the consideration for the merger was discharged by way of swap of shares of First Source Group equivalent to the value shares of First Ring Inc. The assessee received 29,088 shares of First Source Group as a consideration. On 31.03.2010, First Source Solution Ind. was merged into First Source Group and in consideration of merger First Source Group issued, 1,89,394 equity shares and unsecured debt issuance of Rs. 6,735 million (approximately 150 million USD) to the share holder of company. In the financial year relevant to the assessment year under consideration in the ledger account of share premium, the company had passed entries if interest on FCCB as well as premium payable on FCCB on different dates and acknowledged the liabilities on pro-rata premium payable in redemption of FCCB amounting to Rs. 28.81 crores. Accordingly, the AO held that the assessee has committed default u/s 196C of the Act and hindered itself liable to proceedings u/s 201 (1) along with section 201 (1A) of the Act for the interest applicable thereon.
In the financial year 2010-11, the assessee company had paid bank guarantee commission of Rs. 0.587 crore to ICICI Bank. The AO observed that the assessee had not deducted the tax at source as per section 194H of the Act. Therefore, the AO held the assessee company in default of section 194H and liable u/s 201 (1) along with section 201 (1A).
3 Assessment Year: 2012-13 In the first appeal, the assessee challenged inter alia findings on both the issues of the AO. The Ld. CIT (A) decided the first issues in favour of the assessee relying on the decision of ITAT passed in assessee’s own case for the A.Y. 2011-12 and decided the second issue following the decision of the ITAT. The revenue is in appeal against the said findings of the Ld. CIT (A).
The revenue has preferred this appeal before the Tribunal on the following effective grounds:- 1. “Whether on facts and circumstances of the case and in law, the Ld. CIT (A) erred in holding that no TDS was required to be deducted on interest payable on FCCB u/s 196C of the IT Act 1961, failing to appreciate that the assessee itself had made provision for interest payable in its books of account.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the short deduction u/s 201 (1) and interest u/s 201 (1A) of the I.T. Act, in respect of bank guarantee commission on the basis of reasoning that bank guarantee commission is not in the nature of “commission” and no TDS was required to be deducted on such charges paid to bank u/s 194H of the I.T. Act, 1961.
3. On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in holding that no TDS was required to be deducted on bank guarantee commission paid to banks u/s 194H of the I.T. Act, 1961, failing to appreciate that in substance and in fact the relationship between the assessee company and banks was in the nature of principal and agents relationship and the payment made to banks for services rendered falls within the meaning of section 194H of the Act.” 5. Before us, the Ld. Departmental Representative (DR) relying on the assessment order submitted that the Ld. CIT (A) has wrongly decided both the issues in favour of the assessee. The AO has rightly held the assessee was 4 Assessment Year: 2012-13 required to deduct tax at source interest payable on FCCB u/s 196C of the Act. The Ld. CIT (A) has further erred in holding that bank guarantee commission is not in the nature of commission and not TDS was required to be deducted on surcharges without appreciating that in substance the relationship between the assessee company and banks was in the nature of principal and agent and the payment made to the banks for services rendered falls within the meaning of section 194H of the Act. 6. On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT (A) submitted that both the issues are covered in favor of the assessee and since the findings of the Ld. CIT (A) are based on the decision of the jurisdictional ITAT, there is no merit in the appeal of the revenue and the same is liable to be set aside. 7. We have heard the rival submissions and also gone through the material on record. The first ground of the revenue’s appeal pertains to applicability of TDS on interest/premium on FCCBs. We notice that the Ld. CIT (A) has decided the said issue in favour of the assessee by following the order of the co- ordinate Bench passed in assessee’s own case for the A.Y. 2011-12. The relevant portion of the order of the assessee reads as under:- “7. I have considered the facts of the case, order of the AO, submission of the appellant and the order of the Hon’ble ITAT in the case of appellant for AY 2011-12. The issue in dispute is whether there is liability to TDS u/s 196C r.w.s. 115AC on the interest on FCCB. 7.1 The Hon’ble ITAT vide order dated 27.05.2016 in has held interalia as under:-
We have considered rival contentions and found from the record that the assessee had issued Foreign Currency Convertible Bonds (FCCB) of USD 275 million on 3 December 2007 to be redeemed on 4 December 2012 at 139.37% of the principal amount (implicit interest rate of 6.86% (p.a.). The terms of issue of the FCCBs provides an option to the FCCB holder to get the bonds converted into equity shares or redeem the same.
5 Assessment Year: 2012-13 In case the same are not converted into equity shares during the period of FCCBs, they shall be redeemed on the date of maturity i.e. 04/12/2012.
The crucial question before us is as to whether the assessee can be treated as an assessee in default”for not deducting tax at source u/s 196C of the IT Act in the assessment year 2011-2012 in respect of premium on the Zero percent Foreign Currency Convertible Bonds (“FCCB”) issued by it. As per the terms of FCCB, the FCCBs were issued on 3rd December, 2007 redeemable on 4th December, 2012. The FCCBs were convertible at the option of the bondholder into fully paid equity shares at any time between 14th January, 2008 and 23rd November, 2012. The FCCBs could be bought back by the assessee prior to their maturity. This buy back option was, in fact, exercised as is evident from the order dated 5th March, 2014 passed u/s 143 (3) r.w.s. 144C (3) of the Act for the assessment year 2010-2011. The FCCB’s were redeemable at a premium of 39.37% payable on maturity in the event of the bond not being earlier bought back or converted into shares.
The provisions of Section 196C of the Act, reads as under:- “Where any income by way of interest or dividends in respect of bonds or Global Depository Receipts referred to in Section 115AC or by way of long- term capital gains arising from the transfer of such bonds or Global Depository Receipts is payable to a non-resident, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier deduct income-tax thereon at the rate of ten per cent. Provided that no such deduction shall be made in respect of any dividends referred to in Section 115-O. It is evident from the above that the following cumulative conditions precedent (ALL of which are required to be satisfied) are required to fulfilled before an assessee can be regarded as obliged to deduct tax u/s 196C of the Act. The Section is analyzed below: IF: A. Any income by way of interest in respect of bonds B. Is payable C. To a non-resident D. TDS thereon has to be deducted: I. At the time of credit to the account of the payee, or II at the time of payment thereof if any one of these conditions is not fulfilled, the assessee has no obligation to deduct tax. It is to be noted that section 196C does not have any Explanation on the lines of Sections 193, 194A, 6 Assessment Year: 2012-13 194C, 194G, 194H, 194I, 194J, 194K, 195 and 196A of the Act which provide the credit to any account, whether called a “Suspense Account” or any other account also triggers the tax deduction provisions.
We found that none of the above conditions are attracted in the case of the assessee. We also found that during the financial year ended on 31st March, 2011, there was no question of there being any income by way of interest, as the FCCBs were zero percent bonds carrying no interest and only giving the bondholder a right to get a premium of 39.37% on maturity. We also found that no interest whatsoever was payable during the financial year ended 31 March 2011. The word “payable” requires that a liability must accrue against the assessee during the year ended 31 March 2011 for the payment of the alleged interest and that a corresponding right/debt has to accrue to the bondholder. In this connection reliance is placed on the decision of the Supreme Court in the case of E.D. Sassoon & Company Ltd. and Others v/s. CIT (1954) 26 ITR 27 (SC).
9. Furthermore, as per the terms of the issue it was not possible to identify the persons to whom the premium on maturity (allegedly treated as interest by the Department) will be paid. This is because, prior to the maturity date’ The bondholder may transfer the bonds by trading them on the Singapore Stock Exchange. The bonds may be bought back by the Appellant Company prior to the maturity date’ The bonds may be converted into equity shares prior to the maturity date. Our above proposition is fully supported by two decisions of the Mumbai Bench of the ITAT viz, Industries Development Bank of India v/s. ITO (2007) 107 ITD 45 (Mum)’and Pfizer Ltd. v/s ITO (TDS) (ITA No. 1667/M/10). The decision in the case of Pfizer Ltd. is of relevance because in that case the ITAT has held that there was no question of treating the assessee as an “assessee in default” in respect of non- deduction of TDS, even though the assessee had made a provision for ITA No. 7727/14 expenses in its books of accounts. Reliance is also placed on the decision of the Chennai Bench of the ITAT in the case of Dishnet Wireless Limited (supra), where also the issue was regarding TDS on provisions made. Furthermore, the obligation to deduct TDS can arise only if the alleged interest on the FCCBs is liable to tax in India.
Now, coming to the observation made by lower authorities to the effect that assessee itself has made entry in the books of accounts, therefore, liable to deduct tax thereon. It is now settled position by several decisions of Hon’ble Supreme Court including the latest decision in the case of Tools Ltd. Vs. JCIT (2015) 55 taxmann.com 361 (SC) that entries in the books of accounts are not 7 Assessment Year: 2012-13 relevant. In any event, the assessee has reversed the entry for TDS in the immediate next financial year.
In view of the above, we do not find any merit in the AO’s action for holding the assessee as assessee in default for non-deduction of tax at source. 7.2 Hence, respectfully following the decision of the Hon’ble ITAT Mumbai, supra, the facts remaining the same, it is held that appellant did not had liability to deduct tax u/s 196C r.w.s. 115AC of the Act. The A.O is directed to delete the tax demand raised u/s 201 (1)/201(1A) on this account. Ground is allowed”
8. Since, the Ld. CIT (A) has decided the said issue in favour of the assessee by following the decision of co-ordinate Bench rendered in the assessee’s own case for the A.Y. 2011-12, we do not find any infirmity in the order of the Ld. CIT (A) to interfere with. We accordingly uphold the findings of the Ld. CIT (A) on this issue and dismiss ground no. 1 and 2 of the revenue’s appeal.
The second issue pertains to bank guarantee commission. The Ld. CIT
(A) had decided this issue in favour of the assessee against Department holding as under:- “8. Ground No. 2 of appeal is raised against holding that providing of Bank Guarantee results in principal-agent relationship between the bank and the appellant and hence liable to tax deduction at soruce u/s 194H of the Act.
8.1 It is observed that A.O. that in FY 2011-12, the assessee company has paid Bank Guarantee Commission of Rs. 0.587 Crores to M/s ICICI Bank. In the said commission payment, no TDS was deducted as per Section 194H, thus the assessee company is in default of Section 194H and liable to be proceeded u/s 201 (1) along with Section 201 (1A).
8.2 In appeal it is submitted that the issue was considered by my Ld. Predecessor CIT (A) in AY 2011-12 and it was held that the appellant did not had the liability to deduct tax u/s 194H and that 8 Assessment Year: 2012-13 the facts during the year under consideration is same as previous year. 8.3 I have considered the facts of the case, order of the AO, submission of the appellant and the order of my Ld. Predecessor for AY 2011-12. It was observed by my Ld. Predecessor in her order for AY 2011-12 that:
4.3 The Assessing Officer’s order, submissions made for the appellant and materials on record have been considered. This issue stands covered by the decision of Hon’ble ITAT (Mum). In the favour of appellant in the case of Kotak Securities Limited vs. DCIT (ITAT Mumba) wherein it is inter alia held as under “ 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 principle to principle 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 which the expression in set out and the context in which expression commission appears in section 194H i.e. along with 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 fess 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 194H is quite in harmony with the 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 9 Assessment Year: 2012-13 the case of South Gujarat Roofing tiles Manufacturers Association Vs. State of Gujarat (1976) 4 SCC 601) Hon’ble Supreme court were in seizing of a situation in which an expression, namely proceeding, 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 though include is generally used in interpretation clause as a word of enlargement in some case context might suggest a different intention. Their lordships then concluded that though the expression used in the definition clause 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 connotation 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 express ‘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. vs. ACIT (ITA No434/Del/11) order dated 16.122011), Fosters India Ltd. Vs. ITO(117 TTJ 346), and Ajmer Zila Dugdh Utpadak SanghVrs. ITO (34 SOD 216), principle agent relationship is a sine qua non of invoking provisions of section I94H. In the case before us, there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issue 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 inconsideration 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 requirement u/s 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 194H that the question of levy of interest under section 201(1A) cannot arise. In view of the above discussions, we quash impugned demands under section 201(1). and 201(1A) r.w. s. 194H.
10 Assessment Year: 2012-13 4.4 Respectfully following the decision of Hon’ble ITAT, supra the assesse. is not liable to tax deduction at source under section 194 H on bank guarantee commission. The tax demand so raised stands deleted. 8.4 Respectfully following the decision of Hon’ble ITAT, and my Ld. Predecessor for AY 2011-12, 'supra'., it Is held that the assessee Is not liable to deduct tax at source under section 194 H on bank guarantee commission. The A.O is directed to delete the tax demand raised u/s, 201(1)/201(IA} on this account. Ground is allowed.”
10. We notice that this issue is covered in favour of the assessee by the decisions of the various Benches of the Tribunal and the judgment of the Hon’ble Supreme Court. Since, the Ld. CIT(A) has decided this issue in favour of the assessee by following the order of his Predecessor passed in the assessee’s own case for the assessment year 2011-12 which is based on the decision of the co-ordinate Bench rendered in Kotak Securities Limited vs. DCIT, decision of the Hon’ble Supreme Court in the case of South Gujrat Roofing Tiles Manufacturers Association vs. State of Gujarat (1976) 4SCC 601 and other decisions rendered by the various benches of the Tribunal, we do not find any reason to interfere with the findings of the Ld. CIT(A). We, therefore uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. In the result, appeal filed by the revenue for assessment year 2012-2013 is dismissed.