2017 (8) TMI 1292 - AT - Income Tax

TDS u/s 194H - bank guarantee charges paid to domestic and foreign banks - Non compliance of TDS provisions - Held that - There is no quarrel that the issue stood squarely covered in assessee s favor by the decision of this Tribunal rendered in Kotak Securities Limited Vs. DCIT 2012 (2) TMI 77 - ITAT MUMBAI where the Tribunal held that since the payment were on principal to principal basis, the same was not covered within the meaning of commission and brokerage u/s 194H. The same view is fortified by CBDT notification No. 56/2012 dated 31/12/2012 which clearly says that no TDS is required against bank guarantee commission paid to bank listed in the second Schedule to RBI Act, 1934. However, foreign bank is excluded from the scope of said circular. Therefore, at the outset, we are inclined to hold that there was no requirement to deduct TDS on bank guarantee commission of ₹ 371.25 Lacs paid by assessee to domestic bank.Also it is noted that CBDT circular do not cover payment to foreign banks and further provisions of Section 194H apply only to payments made to residents. Therefore , bank gaurantee charges are not covered u/s 194H - Revenue s appeal stands dsimissed. Assessee-in-default u/s 201(1) r.w.s. 201(1A) - Held that -Since TDS liability dosent stand in above case relating to bank gaurantee charges then consequential interest u/s 201(1A) on the same is also been dismissed. TDS on telephone expenses / data card expenses - Held that - Since the assessee has contended that the data card expenses is akin to telephone expenses and mere reimbursement of data card expenses to employees, we restore the matter back to the file of AO for the purpose of verification of the said contention and decide accordingly as per law. Needless to say, any reimbursement of mere data card expenses to employees, which are primarily in the nature of telephone expenses do not fall within the meaning of Fees for technical services or royalty . TDS on internet charges - TDS u/s 194I or 194J - AO opines that the same are in the nature of Fees for Technical Services as well as royalty - Held that - CIT(A) went a step further in noting that the said expenditure was not only fees for technical services but also covered u/s 194I being in the nature of rent for usage of equipment. A perusal of the sample invoice placed in the paper book, prima facie, reveals that the said expenditure is towards internet services & internet dedicated line . Therefore, this being the case, the nature of services being availed by the assessee requires re-appreciation by lower authorities and hence, the matter is remitted back to the file of Ld. AO to re-examine the nature of services and thereafter, determine the true character of the same i.e. whether fees for technical services / royalty / rent or payment towards usage of standard internet facility and in particular, the following observation of Apex Court regarding fees for technical services made in CIT Vs. Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT . Resultantly, the assessee s appeal stands partly allowed for statistical purposes.

Summary

Issues Involved:
1. Liability of the assessee to deduct TDS on bank guarantee charges.
2. Liability of the assessee to deduct TDS on internet charges/data card expenses.

Detailed Analysis:

1. Liability of the Assessee to Deduct TDS on Bank Guarantee Charges:

The assessee, a resident corporate entity, was treated as an assessee-in-default under sections 201(1) and 201(1A) of the Income Tax Act, 1961, for not deducting TDS on various payments, including bank guarantee charges. The Assessing Officer (AO) classified these charges as commission/brokerage under Section 194H, necessitating TDS.

The assessee contended that bank guarantee charges were in the nature of interest under Section 2(28A) and, being paid to banks, were exempt from TDS as per Section 194A(3). The assessee also cited the Mumbai Tribunal's decision in Kotak Securities Limited Vs. DCIT, which held that such payments were on a principal-to-principal basis and not subject to TDS under Section 194H. The AO disagreed, arguing that the payments were commission/brokerage under Explanation (i) to Section 194H.

The First Appellate Authority (CIT(A)) sided with the assessee, referencing the Kotak Securities case. The Revenue appealed, but the Tribunal dismissed the appeal, noting that payments to domestic banks were not subject to TDS per the Tribunal's prior decision and CBDT notification No. 56/2012. However, payments to foreign banks were not covered by this circular, and the lower authorities failed to examine the issue correctly. Consequently, the Tribunal held that the payments to foreign banks were not within the ambit of Section 194H, leading to the dismissal of the Revenue's appeal and the related interest under Section 201(1A).

2. Liability of the Assessee to Deduct TDS on Internet Charges/Data Card Expenses:

The assessee incurred internet charges amounting to ?62,20,232/-, with ?15,96,662/- paid to service providers like Verizone Communication India, Reliance Communications, and Tata Teleservices Ltd. The AO opined that these payments constituted fees for technical services and royalty under Section 9(1)(vii) and Section 9(1)(vi), respectively, necessitating TDS under Section 194J. The AO also referenced the Tribunal's decision in ACIT Vs. Sanskar Info T.V.P. Ltd.

The CIT(A) upheld the AO's decision, citing the retrospective amendment to the definition of 'royalty' by the Finance Act, 2012, and the Madras High Court's decision in Verizone Communications Singapore Pvt Ltd. The CIT(A) also held that the payments were akin to rent under Section 194I.

The Tribunal found that the lower authorities failed to appreciate the nature of the services. The Tribunal noted that the payments were for standard internet connectivity, not technical services or royalty. The Tribunal referenced the Supreme Court's decision in CIT Vs. Kotak Securities Ltd., which distinguished between services and facilities, stating that technical services involve human effort and are specialized, exclusive, and cater to individual needs.

The Tribunal restored the matter to the AO for re-examination, emphasizing that reimbursement of data card expenses to employees, akin to telephone expenses, does not attract TDS. The Tribunal directed the AO to verify the nature of these expenses and decide accordingly.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals for statistical purposes, remanding the issues related to internet charges and data card expenses for further verification by the AO. The Tribunal emphasized the need for a correct appreciation of the nature of services and payments to determine the applicability of TDS provisions. The order was pronounced in the open court on 28th June, 2017.