2019 (10) TMI 656 - AT - Income Tax

Tribunal ruling in favor of assessee, deleting bank guarantee commission addition

The Tribunal allowed the appeal, ruling in favor of the assessee and deleting the addition of bank guarantee commission. The Tribunal held that the TDS ... Tax deduction at source under section 194H - scope of 'commission or brokerage' - principal-agent relationship as prerequisite for section 194H - characterisation of bank guarantee commission as interest under section 2(28A) - application of exemption under section 194A(3)(iii) - binding effect of coordinate Bench decision - prospective operation of statutory amendments/notificationsTax deduction at source under section 194H - scope of 'commission or brokerage' - principal-agent relationship as prerequisite for section 194H - binding effect of coordinate Bench decision - Bank guarantee commission paid to a bank by the assessee is not liable to deduction of tax at source under section 194H. - HELD THAT: - The Tribunal followed the coordinate-bench reasoning in Kotak Securities Ltd. and other authorities that the expression 'commission or brokerage' in the context of section 194H must be read in its contextual sense and is confined to payments made as reward for effecting sales or transactions in a principal-agent relationship. A bank issuing a guarantee for the assessee does not stand in a principal-agent relationship with the assessee; the bank's fee described as 'bank guarantee commission' is a charge for a service/product on a principal to principal basis and not a commission in the statutory sense. Consequently the mandatory condition (principal-agent relationship) for invoking section 194H is absent and no TDS under section 194H is attracted.Addition on account of bank guarantee commission confirmed as liable to TDS under section 194H was deleted; no obligation to deduct tax at source under section 194H.Characterisation of bank guarantee commission as interest under section 2(28A) - application of exemption under section 194A(3)(iii) - prospective operation of statutory amendments/notifications - Bank guarantee commission partakes the character of interest within the meaning of section 2(28A) and is therefore covered by the exemption under section 194A(3)(iii); the coordinate bench view prior to Notification No.56/2012 remains applicable. - HELD THAT: - The Tribunal accepted that bank guarantee commission has the character of interest as contemplated by section 2(28A) and thus falls within the exemption provided by section 194A(3)(iii). The ld. CIT(A)'s refusal to follow the coordinate bench decision on the ground that Kotak Securities was rendered inapplicable by Notification No.56/2012 was rejected. The Tribunal held that the earlier coordinate bench conclusion that such payments do not attract TDS remains applicable and that statutory change or notification asserted to have prospective operation did not warrant departing from the coordinate bench precedent in the facts of this case.The assessment addition on account of bank guarantee commission was deleted as the payment is not exigible to TDS under section 194H and is covered by exemption under section 194A(3)(iii).Final Conclusion: The appeal was allowed: the Tribunal deleted the addition of the bank guarantee commission for AY 2012-13, holding that such commission is not taxable under section 194H (absence of principal-agent relationship) and is characterised as interest attractable to the exemption under section 194A(3)(iii); the coordinate bench precedent was followed and the CIT(A)'s contrary conclusion set aside. Issues:1. Disallowance of expenditure on bank guarantee commission.2. Interpretation of CBDT Notification No. 56/2012.3. Applicability of TDS under section 194H on bank guarantee commission.4. Principal-agent relationship for invoking provisions of Section 194H.5. Exemption under Section 194A(3)(iii) for bank guarantee commission.Analysis:1. The appellant sought to set aside the order passed by the Commissioner of Income-tax (Appeals) disallowing the expenditure on bank guarantee commission. The Assessing Officer disallowed the commission under section 14A (ia) of the Income-tax Act, 1961, as the new scheme effective from 01.01.2013 required TDS on such payments. The appellant contended that the order was contrary to facts and law.2. The appellant argued that the CBDT Notification No. 56/2012 was misconstrued by the CIT(A) and that the scheme did not require TDS on the bank guarantee commission. The intention behind the notification was to reduce hardship for the deductee, which the CIT(A) failed to consider.3. The Tribunal analyzed the issue of TDS under section 194H on bank guarantee commission. The appellant relied on a judgment stating that bank guarantee commission does not fall under TDS provisions. The Tribunal agreed, emphasizing the lack of a principal-agent relationship between the bank and the assessee, making TDS unnecessary.4. The Tribunal reiterated that a principal-agent relationship is essential for invoking Section 194H. As the bank issuing the guarantee did not act as an agent for the assessee, TDS was not required. The nature of the bank guarantee commission was considered akin to interest, making it exempt under Section 194A(3)(iii).5. The Tribunal referenced a prior judgment to support its decision, highlighting that the bank guarantee commission did not fit the definition of commission or brokerage under Section 194H. The decision was made based on the lack of a principal-agent relationship and the character of the payment as interest, leading to the deletion of the addition made by the Assessing Officer.In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee and deleting the addition of bank guarantee commission, as the TDS provisions were not applicable due to the absence of a principal-agent relationship and the nature of the payment as interest.