2016 (1) TMI 678 - AT - Income Tax

TDS u/s 194H - non deduction on bank guarantee commission - Held that - When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as bank guarantee commission . 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 under section 194H. We are, therefore, of the considered view that the CIT(A) indeed erred in holding that the assessee was indeed under an obligation to deduct tax at source under section 194H from payments made by the assessee to various banks. As we have held that the assessee was not required to deduct tax at source under section 194H, the question of levy of interest under section 201(1A) cannot arise. The scope and effect of section 194H (w.e.f. 01/06/2001), section 194H as also amendment of section 197 made by the Finance Act 2001 have been elaborated in departmental circular no.14 of 2001. Further, the scope and effect of the amendment made in opening portion of section 194H by the Finance Act, 2002 have been further elaborated in departmental circular no.8 of 2002 dated 27/08/2002. In view of the above discussions, we quash the impugned demands under section 201(1) and 201(1A) r.w.s. 194H. - Decided in favour of assessee.

Summary

Issues:
Appeal by Revenue against impugned orders on bank guarantee commission and tax deduction under sections 194H and 201(1)/201(1A) of the Act.

Detailed Analysis:
1. Grounds of Appeal: The appeals by the Revenue challenged the orders of the First Appellate Authority regarding the non-deduction of tax on bank guarantee commission under section 194H and deletion of additions under sections 201(1)/201(1A) of the Act.

2. Interpretation of Section 194H: The Tribunal analyzed the provisions of section 194H, emphasizing the requirement of tax deduction on 'commission or brokerage'. The Tribunal highlighted the definition of 'commission or brokerage' and the need to interpret these terms in their common parlance sense, considering the principle of noscitur a sociis.

3. Legal Connotations: The Tribunal delved into the legal definitions of 'commission' and 'brokerage' from commercial law sources, clarifying that these terms refer to compensation for services rendered in sales or business transactions. The Tribunal emphasized that 'bank guarantee commission' does not fall under the scope of 'commission or brokerage' as per the common understanding of these terms.

4. Inclusive Definition: The Tribunal discussed the inclusive definition of 'commission or brokerage' in Explanation to Section 194H, stating that it does not broaden the meaning beyond its ordinary connotations. The Tribunal cited precedents to support the view that a principal-agent relationship is essential for invoking Section 194H.

5. Principal-Agent Relationship: The Tribunal concluded that no principal-agent relationship exists between a bank issuing a guarantee and the assessee, as the bank's role is limited to providing a guarantee for a fee. This transaction does not align with the common understanding of 'commission' in business dealings, thereby exempting it from tax deduction under Section 194H.

6. Circulars and Amendments: The Tribunal referenced departmental circulars to elaborate on the scope and amendments to Section 194H, providing additional context for their decision to quash the demands under Section 201(1) and 201(1A) in this case.

7. Judgment: Ultimately, the Tribunal dismissed the Revenue's appeals, affirming that the assessee was not obligated to deduct tax under Section 194H for bank guarantee commission payments, thereby negating the levy of interest under Section 201(1A).

This comprehensive analysis of the legal judgment highlights the Tribunal's meticulous examination of the statutory provisions, legal definitions, and precedents to arrive at a well-reasoned decision in favor of the assessee regarding tax deductions on bank guarantee commission.