Appeal allowed, bank guarantee charges not subject to TDS under Income Tax Act

The ITAT Delhi allowed the appeal, ruling in favor of the assessee and directing the deletion of the disallowance of bank guarantee charges under Section 40(a)(ia) of the Income Tax Act, 1961. The ITAT held that payments to scheduled banks for bank guarantee charges do not attract TDS provisions, citing judicial precedents and legal provisions. The CIT(A)'s findings were considered unfounded, leading to the instruction for the AO to remove the addition of Rs. 10,58,963.

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Issues Involved:
1. Disallowance of Bank Guarantee Charges under Section 40(a)(ia) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Bank Guarantee Charges under Section 40(a)(ia)

Background:
- The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-37, New Delhi, dated 25.05.2017, for the Assessment Year 2013-14.
- The primary ground of appeal was the disallowance of bank guarantee charges amounting to Rs. 10,58,963/- by invoking the provisions of Section 40(a)(ia) of the Income Tax Act, 1961, on the basis that the assessee failed to deduct TDS on the payment.

Assessment Officer's (AO) Position:
- The AO disallowed the bank guarantee charges on the grounds that the assessee was required to deduct TDS but failed to do so, as per the assessment order dated 22.03.2016.

Commissioner of Income Tax (Appeals) [CIT(A)] Position:
- The CIT(A) upheld the AO's disallowance, maintaining that the payment was subject to TDS provisions.

Assessee's Argument:
- The assessee contended that the payment of bank guarantee charges to a scheduled bank is not covered under any TDS provisions.
- The assessee referenced a previous ITAT decision in their favor for the Assessment Year 2011-12, where it was held that such payments did not attract TDS provisions.

ITAT's Analysis:
1. Precedent Reference:
- The ITAT referred to its earlier decision dated 31.05.2017, in the assessee's own case for the Assessment Year 2011-12, where it was held that bank guarantee fees paid to a scheduled bank do not fall under the purview of TDS provisions.

2. Legal Provisions and Notifications:
- The ITAT examined Section 197A(1F) and Notification No. 56/2012, which clarified that no TDS shall be deducted on payments such as bank guarantee commission made to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934, effective from 01.01.2013.
- It was emphasized that the guarantee fees do not fall within the definition of "interest" under Section 2(28A) of the Act, nor do they create a principal-agent relationship that would categorize them as commission or brokerage.

3. Judicial Precedents:
- The ITAT cited various judicial precedents, including the Hon’ble Supreme Court's decision in CIT vs. Kotak Securities Ltd., which supported the view that bank guarantee fees are not subject to TDS under Section 194J.

4. CIT(A)’s Findings:
- The ITAT found that the CIT(A)'s conclusion that the payment was for technical services was without any basis or supporting material. The AO had not alleged the applicability of Section 194J, and there was no evidence that the bank provided technical services to the assessee.

Conclusion:
- The ITAT concluded that the disallowance of Rs. 10,58,963/- under Section 40(a)(ia) was not justified.
- The ITAT set aside the order of the CIT(A) and directed the AO to delete the addition.

Final Judgment:
- The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 4/12/2019.

Summary:
The ITAT Delhi ruled in favor of the assessee, directing the deletion of the disallowance of bank guarantee charges under Section 40(a)(ia) of the Income Tax Act, 1961. The ITAT relied on previous judicial precedents and clarified that such payments to scheduled banks do not attract TDS provisions. The CIT(A)'s findings were deemed baseless, and the AO was instructed to delete the addition of Rs. 10,58,963/-.

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