KHAZANA JEWLLERY PRIVATE LIMITED,CHENNAI vs. ACIT, CHENNAI

per ld. Assessing Officer such payments were fees for technical

services and was liable for deduction of tax at source u/s. 194J of the

Act. Though assessee relied on CBDT instruction No.56/2012, dated

ITA Nos.1829-1833/Mds/2014. :- 8 -:

31.12.2012. Ld. Assessing Officer was of the opinion that the said

instruction came into effect only from 01.01.2013 and could not be

applied to payments made prior to that date. He considered the

assessee as one in default for not deducting TDS on such payments

effected to banks as well and directed the assessee to deposit tax at

the rate of 10% on such payments alongwith interest as specified u/s.

201(1A) of the Act.

Aggrieved, the assessee moved in appeal before the ld. 8.

Commissioner of Income Tax (Appeals). Contention of the assessee

before ld. Commissioner of Income Tax (Appeals) were as under:- (i) Advance received from customers were not in nature of money borrowed or debts incurred or deposits or a claim or right of similar kind. (ii) There was no credit of any incentive in the customers account but only discount given on the invoice value. (iii) Assessee was under an obligation to give discount as per terms of contract and not on account of any borrowings or debt. (iv) Facts in the case of Viswapriya Financial Services and Securities Ltd (supra) decided by the Jurisdictional High Court were entirely different and did not apply to a gold incentive scheme.

However, ld. Commissioner of Income Tax (Appeals) was not

impressed by the above arguments. According to him, Board’s circular

No.202, dated 05.07.1976 explained the scope of the definition of

ITA Nos.1829-1833/Mds/2014. :- 9 -:

interest u/s. 2(28A) of the Act. According to him, this circular clearly

indicated that interest included any type of obligation and even

service fee or other charges on credit facilities. As per ld.

Commissioner of Income Tax (Appeals), customers were entitled for

gifts and bonus on the maturity of these scheme, and such gifts and

bonus were nothing but interest.

facilitating credit and debits card payments through point of sale

machine at assessee’s premises. Ld. Commissioner of Income Tax

(Appeals) held that these were rightly considered as technical services

liable for deduction of tax at source u/s. 194J of the Act. With these

observations, ld. Commissioner of Income Tax (Appeals) dismissed the

appeals of the assessee for the impugned assessment years.

Now before us, the ld. Authorised Representative strongly 10.

assailing the orders of the lower authorities submitted that assessee

was receiving money based on contracts entered with the customers

and as per these contracts, assessee was liable to give gold jewellery

at the end of the respective scheme alongwith incentives. Nothing

other than gold was given to the customers nor were the customers

eligible for any refund of money. The installment received were only

advance payments against contracts. As per ld. Authorised

ITA Nos.1829-1833/Mds/2014. :- 10 -:

Representative when gold was given to the customer, advances as

also the incentives were deducted from the invoice price. Further, as

per ld. Authorised Representative at no point of time customer’s

account was credited with any interest. Thus, according to him, lower

authorities fell in error in treating the discounts given by the assessee

as interest u/s. 2(28A) of the Act. As per the ld. Authorised

Representative assessee was not liable to deduct tax u/s. 194A of the

Act on such discounts.

Coming to the issue of non deduction of tax on payments 11.

effected to the banks, ld. Authorised Representative submitted that

issue stood squarely covered by judgment of Hon’ble Delhi High Court

in the case of CIT vs. JDS Apparels Pvt. Ltd (ITA No. 608/2014, dated

18.11.2014). According to the ld. Authorised Representative when a

point of sale machine was used by the customers, what was credited

by the concerned banks in assessee’s account was amounts after

deducting the bank charges. Argument of the ld. Assessing Officer

was that such bank charges were not for any technical services

rendered by the bank. Thus, according to him, Sec. 194J of the Act

had no applicability on such payments.

supporting the orders of the lower authorities submitted that ld.

ITA Nos.1829-1833/Mds/2014. :- 11 -:

Assessing Officer had clearly worked out and demonstrated that

incentives were the equivalent of the interest due on instalments

received from the customers. What the assessee received was

deposits/loans on monthly basis which were repaid through gold

jewellery at the end of the period alongwith equivalent jewellery for

the interest component. According to the ld. Departmental

Representative just because component was given as gold jewellery

would not take it out of the ambit of interest u/s. 2(28A) of the Act. As

per ld. Departmental Representative the said definition was wide

enough to include these types of incentives also.

Coming to the aspect of deduction of TDS on payments 13.

effected to banks, ld. Departmental Representative submitted that

banks were rendering technical services to the assessee by enabling

the assessee to accept credit/debit cards payments. Hence, according

to him, assessee was obliged to deduct TDS on such payments u/s.

194J of the Act. Ld. Departmental Representative submitted that

lower authorities were justified in considering the assessee to be in

default u/s. 201(1) of the Act and also levied interest u/s. 201(1A) of

the Act.

orders of the authorities below. First we take up the question whether

assessee was liable to deduct tax on the incentives given to its

ITA Nos.1829-1833/Mds/2014. :- 12 -:

customers under various gold schemes. The Sections applied by the

ld. Assessing Officer to hold that assessee was liable to deduct TDS on

such incentives or what was termed by the assessee as discount, are

194A and 2(28A) of the Act. Both these Sections are reproduced

hereunder:-

Section 194A of the Act :-

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, 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 issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income- tax under this section. Explanation For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (3) The provisions of sub-section (1) shall not apply-- (i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, 5does not exceed (a) ten thousand rupees, where the payer is a banking company to which the Banking Regulation Act, 1949 (10 of

ITA Nos.1829-1833/Mds/2014. :- 13 -:

1949) applies (including any bank or banking institution, referred to in section 51 of that Act) ; (b) ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking ; (c) ten thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf ; and (d) five thousand rupees in any other case : Provided that in respect of the income credited or paid in respect of--(a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) ; or(b) time deposits with a co-operative society engaged in carrying on the business of banking;(c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for constructions or purchase of houses in India 1for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36,the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be ; (iii) to such income credited or paid to-- (a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co- operative land mortgage bank), or (b) any financial corporation established by or under a Central, State or Provincial Act, or (c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or (d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or (e) any company or co-operative society carrying on the business of insurance, or (f) such other institution, association or body or class of institutions, associations or bodies which the Central

ITA Nos.1829-1833/Mds/2014. :- 14 -:

Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette ; (iv) to such income credited or paid by a firm to a partner of the firm ; (v) to such income credited or paid by a co-operative society to a member thereof or to any other co-operative society ; (vi) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette ; (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) ; (viia) to such income credited or paid in respect of,-- (a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank ; (b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co- operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking ; (viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income-tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Super Profits Tax Act, 1963 (14 of 1963), or the Companies (Profits) Surtax Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45 of 1974). (ix) to such income credited or paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid during the financial year does not exceed fifty thousand rupees. (x) to such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company 6or scheduled bank in relation to a zero coupon bond issued on or after the 1st day of June, 2005, by such company or fund or public sector company 6or scheduled bank ;

ITA Nos.1829-1833/Mds/2014. :- 15 -:

Explanation 1.— For the purposes of clauses (i), (vii) and (viia), "time deposits" means deposits (excluding recurring deposits) repayable on the expiry of fixed periods. (4) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

Section 2(28A) of the Act:-

(28A) "interest" means interest payable in any manner 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 or in respect of any credit facility which has not been utilised ;

For applying Sec. 194A of the Act on the incentives given by the

assessee on its various gold schemes, ld. AO has relied on the

definition of interest u/s. 2(28A) of the Act. Interest has been defined

in Sec. 2(28A) of the Act. There are two limbs to the definition. First

limb is interest payable in any manner for moneys borrowed or debt

incurred. Moneys borrowed or debt incurred can include a deposit,

claim or other similar right or obligation as well. The second limb is an

inclusive one and covers any service fee, or other charge in respect of

moneys borrowed, or debt incurred or in respect of an unutilized credit

facility. Now, we need to have a look on the gold schemes of the

assessee to consider whether what the assessee call as

ITA Nos.1829-1833/Mds/2014. :- 16 -:

incentives/discounts will fall within above definition. Terms and

conditions of golden delight scheme which admittedly is similar to

the gold saving scheme read as under:-

‘’The monthly subscription value must be paid 1. continuously tor 15 months.

Monthly installments to be paid before the last -4. working day of the month (25th of the month for cheque/DD payments)failing which, the scheme will be extended by a month tor every defaults, if any.

5 . Additional instalments paid in a month will be accounted only against subsequent months and not against earlier defaults, it any.

8 Payments can be made only through cash, ECS, credit card, local cheques or demand draft drawn in favour of 'Khazana Jewellery Private Limited'. Extra bank charges as applicable for every bounced transaction . Scheme can be redeemed or closed only in the 9. showroom where the customer has enrolled .

ITA Nos.1829-1833/Mds/2014. :- 17 -:

10 The membership card is not transferable.

Terms and conditions of the gold accumulation plan reads as under:-

ITA Nos.1829-1833/Mds/2014. :- 18 -:

In both schemes there is a clear condition that cash will not be

refunded under any circumstances. It is clearly stated that customers

were entitled only for gold ornaments at the end of the scheme period.

One specimen invoice raised under the said scheme is also placed on

record. The said invoice is verbatim reproduced hereunder:-

Qty Description Purity Gross Net WT Rate V.A. Amount WT (Grams) (Grams) 1 5 GMS 24 5.000 5.000 3248.00 162.40 16402.40 COINS Karat

VAT 164.02 1%

1 5.000 5.000 Total 16566.00

MSNo : O1C1644 Advance Scheme 15000.00 MSNo. Scheme Discount 400.00 MS No. Scheme Discount 1000.00 Cash 166.00

(Rupees Sixteen Thousand Five Hundred and Sixty Six Only) (EMP-S: GOVERDANA CHARRY/C:53/N: SERVER) E & O.E. TIN No.: 28790164971 (04-03-2015 19: 22: 42)

What we find is that against the invoice raised for gold sold at the

end of the scheme, advance given by the customers as also the value

of the incentive /discounts were deducted. Contention of the assessee

that there were no credit of incentive in account of any customer who

had registered under the schemes, has not been disputed by the

ITA Nos.1829-1833/Mds/2014. :- 19 -:

Revenue. Terms and conditions clearly indicate that instalment

received by the assessee based on the schemes were neither money

borrowed nor a debt nor a deposit. These were advances given by

the customers for purchasing jewellery, after the end of of scheme

period. Except for his/her right to get gold jewellery, the customer

had no claim on the assessee nor was the assessee under any other

obligation to them. Thus in our opinion the incentives/ discounts do

not fit within first limb of the definition of interest given in section

2(28A) of the Act.

u/s. 2(28A), it is obviously enacted to rope in service fee, or other

charge in respect of the moneys borrowed, or debt incurred, or in

respect of any credit facility which has not been utilized. As already

mentioned by us, incentives /discounts given by the assessee to its

customers can never be considered as money borrowed or debt

incurred. The question of the amounts being considered as service or

charge on money borrowed therefore does not arise.

scheme what were credited to the respective customers accounts were

equivalent gold weight for the instalments. When the customers

eventually purchased gold at the time of the scheme, they were

ITA Nos.1829-1833/Mds/2014. :- 20 -:

given a bonus of 80% of one instalment, that too in gold only. This

difference in the scheme in our opinion will not make any change on

the nature of the incentives.

Coming to the judgment of Jurisdictional High Court in the 17.

case of Viswapriya Financial Services and Securities Ltd (supra) relied

on by the ld. Assessing Officer, the company there was engaged in

retail finance service where the investors were guaranteed 1.5%

return on their monthly deposits. Such returns were paid every month

to the investors. Investors were also entitled to the principal amount

at the end of the scheme paid. Hon’ble Jurisdictional High Court held

such returns to be nothing but interest. However, in gold schemes

conducted by the assessee, there were no monthly payment of returns

in cash nor was the scheme members entitled to get their money back.

Thus facts of the case before Hon’ble Jurisdictional High Court were

vastly different.

Schemes floated by the assessee at the best could be 18.

considered as a marketing strategy for increasing its sales by

attracting customers through these schemes. Customers who wanted

to purchase jewellery and who had no enough money at one go opted

for these schemes. The scheme ensured that customers remained

with the assessee and eventually purchased the gold jewellery. In our

ITA Nos.1829-1833/Mds/2014. :- 21 -:

opinion, gold given over and above the value of the instalments,

would not come within the definition of interest under Section 2(28A)

of the Act. These could only be considered as incentive/ discount. We

also find that assessee had never credited the account of the

customer with any incentive but only deducted such incentive from

the invoice value. Though treatment in books of accounts may not

be a deciding factor on aspects of taxation, it will have a strong

bearing on what the assessee had in mind while entering into a

transaction. In taking this view we are fortified by the judgment of

Hon’ble Apex Court in the case of CIT vs. Woodward Governor (India)

Ltd 312 ITR 254. Thus, we are of the opinion that assessee was not

liable to deduct tax u/s. 194A of the Act on such discounts/incentives

offered to its customers.

Coming to the next issue regarding payments effected to 19.

banks for facilitating credit/debit cards payments for the customers of

the assessee, through point of sale terminals installed in the premises

of the assessee, what we find is that a similar issue had come up

before the Hon’ble Delhi High Court in the case of JDS Apparels Pvt.

Ltd (supra). Paras 15 and 16 of the judgments are reproduced

hereunder:-

‘’15. Applying the above cited case law to the factual matrix of the present case, we feel that Section 194H of the Act would not

ITA Nos.1829-1833/Mds/2014. :- 22 -:

be attracted. HDFC was not acting as an agent of the respondent-assessee. Once the payment was made by HDFC, it was received and credited to the account of the respondent- assessee. In the process, a small fee was deducted by the acquiring bank, i.e. the bank whose swiping machine was used. On swiping the credit card on the swiping machine, the customer whose credit card was used, got access to the internet gateway of the acquiring bank resulting in the realisation of payment. Subsequently, the acquiring bank realised and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on "behalf" of the respondent- assessee. The relationship between HDFC and the respondent- assessee was not of an agency but that of two independent parties on principal to principal basis. HDFC was also acting and equally protecting the interest of the customer whose credit card was used in the swiping machines. It is noticeable that the bank in question or their employees were not present at the spot and were not associated with buying or selling of goods as such. Upon swiping the card, the bank made payment of the bill amount to the respondent- assessee. Thus, the respondent assessee received the sale consideration. In turn, the bank in question had to collect the amount from the bankers of the credit card holder. The Bank had taken the risk and also remained out of pocket for sometime as there would be a time gap between the date of payment and recovery of the amount paid.

ITA Nos.1829-1833/Mds/2014. :- 23 -:

punched in the swiping machine is credited to the account of the retailer by the acquiring bank, i.e. HDFC in this case, after retaining a small portion of the same as their charges. The banking services cannot be covered and treated as services rendered by an agent for the principal during the course of buying or selling of goods as the banker does not render any service in the nature of agency’’.

That apart, point of sale machines which are within the premises of

the assessee transmits the debit/credit card information to the

bankers, without any human intervention. Human intervention if at

all there, is only on the part of the assessee when he enables the

customer to swipe his/her debit/credit card. We cannot say that any

technical services was rendered by the bank when customers of the

assessee swiped their debit/credit cards in point of sale machines,

installed in the premises of the assessee. The act of the customer

only facilitated transferring money from customers account to

assessee’s account. Technical services has been assigned the same

meaning as given in Explanation (2) to Clause (vii) of sub section 1 of

9, through Explanation (b) to Sec. 194J of the Act. The said

Explanation is reproduced hereunder:-

‘’For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recepient or consideration which would be income of the recipient chargeable under the head "Salaries".

ITA Nos.1829-1833/Mds/2014. :- 24 -:

By facilitating payments through point of sale machine, we cannot say that bank had provided any managerial, technical or consultancy services to the assessee. In our opinion, Sec. 194J of the Act could not have been applied on the charges deducted by the bankers from the accounts of the assessee. Assessee was not liable to deduct tax under the said section on such charges.

In the results, orders of the lower authorities for all the 20. assessment years are set aside. Both the charge under section 201(1) and levy of interest under section 201(1A) of the act are deleted.

In the result, appeals of the assessee are allowed. 21.

Order pronounced on Friday, the 13th day of October, 2017, at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (अ�ाहम पी. जॉज�) (DUVVURU RL REDDY) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated: 13th October, 2017 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF