2014 (3) TMI 1116 - AT - Income Tax

Non-deduction of tax at source on guarantee commission paid to bank Revenue contended that tax to be withhold u/s 194H principal and agent relation - Held that - As decided in the case of Kotak Securities Limited v. DCIT 2012 (2) TMI 77 - ITAT MUMBAI Principal agent relationship is a sine qua non for invoking the provisions of Section 194 H. While it is termed as guarantee commission it is not in the nature of commission as it is understood in common business parlance and in the context of the section 194H. This transaction in our considered view is not a transaction between principal and agent so as to attract the tax deduction requirements u/s 194H. - Decided in favour of assessee.

Summary

Issues:
1. Whether the addition made under section 40(a)(ia) for guarantee commission paid to a bank is liable for deduction of tax at source.
2. Whether the services rendered by the banking authority in guarantee execution are covered under section 194H of the Income Tax Act.
3. Whether there is a principal agent relationship between the bank issuing the bank guarantee and the assessee for tax deduction requirements under section 194H.

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income-tax (Appeals) regarding the addition made under section 40(a)(ia) for guarantee commission paid to a bank. The first appellate authority deleted the disallowance based on the decision of the Mumbai Bench of the Tribunal in the case of Kotak Securities Limited v. DCIT. The Tribunal upheld the decision, stating that there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. Therefore, the transaction is not subject to tax deduction under section 194H.

2. The Mumbai Bench's decision in the case of Kotak Securities Limited clarified that the bank issuing the guarantee does not act as a principal agent for the assessee. The bank's role is limited to accepting the commitment to make payment to the beneficiary upon demand, charging a fee termed as 'bank guarantee commission.' This fee does not fall under the definition of commission as per section 194H. As there is no principal agent relationship, the tax deduction requirements under section 194H do not apply to such transactions.

3. The Tribunal's ruling emphasized that since there is no principal agent relationship between the bank issuing the bank guarantee and the assessee, the transaction does not attract tax deduction under section 194H. The decision in the case of Kotak Securities Limited was followed, affirming that the assessee was not obligated to deduct tax at source under section 194H for payments made to various banks. Consequently, the appeal of the Revenue was dismissed, and the order of the Commissioner of Income-tax (Appeals) was upheld.

This judgment clarifies the tax treatment of guarantee commission payments made to banks and highlights the importance of the principal agent relationship in determining tax deduction requirements under the Income Tax Act.