2019 (11) TMI 80 - AT - Income Tax

Tribunal allows bank guarantee charges, citing CBDT Notification and judicial precedents

The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to allow the claimed bank guarantee charges of Rs. 3,90,289. The Tribunal ... TDS u/s 194H - Disallowance of bank guarantee charges for non deduction of TDS - principal - agent relationship - HELD THAT:- It is sine qua non that there has to be a principal - agent relationship for a payment to be treated as commission or brokerage. The recipient of the income must act on behalf of the principal. Here the banker does not act on behalf of the assessee for rendering any kind of service. The contract of guarantee does not give any rise to principal - agent relationship between the assessee and the bank and, therefore, the consideration received by the bank on account of guarantee commission cannot be reckoned as commission as contemplated under section 194H and accordingly, there was no requirement to deduct TDS on this payment. See CIT vs. JDS Apparels (P.) Ltd. [2014 (11) TMI 732 - DELHI HIGH COURT] , Kotak Securities Ltd. vs DCIT (2012 (2) TMI 77 - ITAT MUMBAI), DCIT vs PRL Projects & Infrastructure Ltd. (2017 (9) TMI 241 - ITAT DELHI), ACIT vs. Jaypee Infratech Ltd. (Supra) and DCIT vs. Lakshya Media (P.) (2016 (8) TMI 867 - ITAT MUMBAI) - Decided in favour of assessee. Issues Involved:1. Disallowance of bank guarantee charges under Section 40(a)(ia) of the Income Tax Act, 1961 due to failure to deduct tax at source.2. Whether disallowance under Section 40(a)(ia) is applicable if the payee has included the sum in its return of income and paid the tax due.Detailed Analysis:Issue 1: Disallowance of Bank Guarantee Charges under Section 40(a)(ia)The central issue in this appeal is the allowability of the assessee’s claim for expenses on account of bank guarantee charges amounting to Rs. 3,90,289/-. The Assessing Officer (AO) had disallowed this claim under Section 40(a)(ia) of the Income Tax Act, 1961 on the ground that the assessee had not deducted tax at source. Both the assessee and the Revenue agreed that the issue is covered in favor of the assessee by the CBDT Notification dated 31.12.2012 and by several judicial precedents.Precedents Cited:1. CIT v. JDS Apparels (P.) Ltd.: The Delhi High Court held that the amount retained by the bank as a fee for banking services cannot be treated as commission or brokerage. The court emphasized that Section 40(a)(ia) should not be invoked due to the principle of doubtful penalization, which requires strict construction of penal provisions.2. Kotak Securities Ltd. vs. DCIT: The Mumbai Bench of ITAT held that the term 'commission' in Section 194H does not extend to payments like bank guarantee commission, which are fees for services rendered on a principal-to-principal basis.3. DCIT vs. PRL Projects & Infrastructure Ltd.: The ITAT Mumbai Bench reiterated that no TDS was deductible on bank guarantee commission as there is no principal-agent relationship between the bank and the assessee.4. ACIT vs. Jaypee Infratech Ltd.: The ITAT Delhi Bench held that bank guarantee charges are not subject to TDS under Section 194H.5. DCIT vs. Lakshya Media (P.) Ltd.: The ITAT Mumbai Bench held that the consideration received by the bank on account of guarantee commission cannot be reckoned as commission under Section 194H, and there was no requirement to deduct TDS on this payment.Conclusion for Issue 1:Respectfully following the precedents and considering the CBDT Notification, the Tribunal found that the issue regarding the allowability of bank guarantee charges of Rs. 3,90,289/- is covered in favor of the assessee. The Tribunal set aside the impugned order of the Ld. CIT(A) and directed the AO to allow the claimed amount as bank guarantee charges.Issue 2: No Disallowance under Section 40(a)(ia) if the Payee has Offered the Sum to TaxThe assessee argued that if tax was deductible on the bank guarantee charges, no disallowance should be made under Section 40(a)(ia) because the payee had included the said charges in its return of income and paid the tax due. However, since the primary issue was resolved in favor of the assessee based on the precedents and CBDT Notification, this ground became redundant and was not separately adjudicated.Final Judgment:The appeal of the assessee was allowed. The Tribunal directed the AO to allow the bank guarantee charges of Rs. 3,90,289/- claimed by the assessee. The order was pronounced in the Open Court on 03/10/2019.