Tribunal ruling on TDS liability for bank guarantee charges and internet expenses

The Tribunal dismissed the Revenue's appeal regarding the liability of the assessee to deduct TDS on bank guarantee charges, upholding the assessee's contention that payments to foreign banks were not subject to TDS under Section 194H. In the case of liability to deduct TDS on internet charges/data card expenses, the Tribunal remanded the matter to the AO for re-examination, emphasizing the need to correctly determine the nature of services and payments. The Tribunal partly allowed the assessee's appeals for statistical purposes, directing further verification by the AO.

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Issues Involved:
1. Liability of the assessee to deduct TDS on bank guarantee charges.
2. Liability of the assessee to deduct TDS on internet charges/data card expenses.

Detailed Analysis:

1. Liability of the Assessee to Deduct TDS on Bank Guarantee Charges:

The assessee, a resident corporate entity, was treated as an assessee-in-default under sections 201(1) and 201(1A) of the Income Tax Act, 1961, for not deducting TDS on various payments, including bank guarantee charges. The Assessing Officer (AO) classified these charges as commission/brokerage under Section 194H, necessitating TDS.

The assessee contended that bank guarantee charges were in the nature of interest under Section 2(28A) and, being paid to banks, were exempt from TDS as per Section 194A(3). The assessee also cited the Mumbai Tribunal's decision in Kotak Securities Limited Vs. DCIT, which held that such payments were on a principal-to-principal basis and not subject to TDS under Section 194H. The AO disagreed, arguing that the payments were commission/brokerage under Explanation (i) to Section 194H.

The First Appellate Authority (CIT(A)) sided with the assessee, referencing the Kotak Securities case. The Revenue appealed, but the Tribunal dismissed the appeal, noting that payments to domestic banks were not subject to TDS per the Tribunal's prior decision and CBDT notification No. 56/2012. However, payments to foreign banks were not covered by this circular, and the lower authorities failed to examine the issue correctly. Consequently, the Tribunal held that the payments to foreign banks were not within the ambit of Section 194H, leading to the dismissal of the Revenue's appeal and the related interest under Section 201(1A).

2. Liability of the Assessee to Deduct TDS on Internet Charges/Data Card Expenses:

The assessee incurred internet charges amounting to Rs. 62,20,232/-, with Rs. 15,96,662/- paid to service providers like Verizone Communication India, Reliance Communications, and Tata Teleservices Ltd. The AO opined that these payments constituted fees for technical services and royalty under Section 9(1)(vii) and Section 9(1)(vi), respectively, necessitating TDS under Section 194J. The AO also referenced the Tribunal's decision in ACIT Vs. Sanskar Info T.V.P. Ltd.

The CIT(A) upheld the AO's decision, citing the retrospective amendment to the definition of 'royalty' by the Finance Act, 2012, and the Madras High Court's decision in Verizone Communications Singapore Pvt Ltd. The CIT(A) also held that the payments were akin to rent under Section 194I.

The Tribunal found that the lower authorities failed to appreciate the nature of the services. The Tribunal noted that the payments were for standard internet connectivity, not technical services or royalty. The Tribunal referenced the Supreme Court's decision in CIT Vs. Kotak Securities Ltd., which distinguished between services and facilities, stating that technical services involve human effort and are specialized, exclusive, and cater to individual needs.

The Tribunal restored the matter to the AO for re-examination, emphasizing that reimbursement of data card expenses to employees, akin to telephone expenses, does not attract TDS. The Tribunal directed the AO to verify the nature of these expenses and decide accordingly.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals for statistical purposes, remanding the issues related to internet charges and data card expenses for further verification by the AO. The Tribunal emphasized the need for a correct appreciation of the nature of services and payments to determine the applicability of TDS provisions. The order was pronounced in the open court on 28th June, 2017.

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