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 -1833/Mds/2014. :- 8 -:

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 -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.

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 -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.

12. Per contra, ld. Departmental Representative strongly supporting the orders of the lower authorities submitted that ld. -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.

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 -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 -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 ; -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 -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.

2. After having paid the subscription for 15 months, the member can purchase jewellery for the maturity value on or after the maturity date.

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 .

-1833/Mds/2014. :- 17 -:

10 The membership card is not transferable.

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

-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 -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.

16. Coming to the third scheme called gold accumulation plan 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 -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 -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 -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.

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".

-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.