2020 (1) TMI 77 - AT - Income Tax

TDS u/s 194H - allowability of the bank guarantee commission - addition under section 40(a)(ia) - HELD THAT - Since the issue is no longer res Integra and has squarely been covered in assessee s own case for the earlier year by the orders of the Tribunal, while respectfully following the same we reach the conclusion that in the absence of any principal agent relationship between the bank issuing bank guarantee and the assessee, the transaction between them is not transaction between the principal and agent so as to attract the tax deduction under section 194H of the Act, and the addition made in this case under section 40(a)(ia) of the Act cannot be sustained. We accordingly allow the grounds of appeal, and direct the assessing officer to delete the addition - Decided in favour of assessee.

Summary

Issues:
1. Tax deduction on bank guarantee commission under section 40(a)(ia) of the Income Tax Act.
2. Applicability of section 197A (1F) of the Act on bank guarantee commission payments.
3. Allowability of bank guarantee commission as an expenditure.

Analysis:

1. Tax Deduction on Bank Guarantee Commission:
The Assessing Officer noted that the assessee paid a bank guarantee commission, which was not covered under the definition of interest under section 2(28A) of the Income Tax Act. Consequently, the exemption provided under section 194A(3)(iii)(a) of the Act did not apply to such payments. The AO concluded that the assessee was required to deduct TDS on the bank guarantee commission but failed to do so, resulting in disallowance under section 40(a)(ia) of the Act.

2. Applicability of Section 197A (1F) of the Act:
The Commissioner of Income Tax (Appeals) held that the notification of payments under section 197A(1F) of the Act implied that tax was required to be deducted from bank guarantee commission payments made till 31/12/2012. The CIT(A) confirmed the disallowance of the bank guarantee commission as tax was not deducted, citing provisions of section 40(a)(ia) of the Act.

3. Allowability of Bank Guarantee Commission:
The assessee contended that bank guarantee commission paid to a specified bank should be considered an allowable expenditure. Referring to tribunal decisions, the assessee argued that if there was no principal-agent relationship between the bank and the assessee, tax deduction under section 194H of the Act was not applicable. The Tribunal agreed, stating that in the absence of a principal-agent relationship, the transaction between the bank and the assessee did not attract tax deduction under section 194H. Consequently, the addition under section 40(a)(ia) of the Act was deemed unsustainable, and the assessing officer was directed to delete the disallowed amount.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the bank guarantee commission payment was an allowable expenditure due to the absence of a principal-agent relationship, leading to the deletion of the disallowed amount.