2019 (10) TMI 656 - AT - Income Tax

TDS u/s 194H from payment of bank guarantee commission to the bank - principal-agent relationship - HELD THAT - When the bank has issued bank guarantee on behalf of the assessee there is no principal agent relationship between the bank and the assessee which is a mandatory condition for invoking the provisions contained u/s 194H and in these circumstances, the assessee was not liable to deduct tax at source u/s 194H from payment of bank guarantee commission to the bank. Moreover, bank guarantee commission also partakes the character of interest u/s 2(28A) of the Act and as such, exemption provided u/s 194A(3)(iii) is available to the assessee qua such payment. So, we are of the considered view that the CIT (A) has erred in not following the decision of Kotak Securities Ltd. 2012 (2) TMI 77 - ITAT MUMBAI on the ground that it is not applicable having been pronounced before the issue of Notification No.56/2012 dated 31.12.2012 because ordinarily any provision of the statute has to be read having prospective effect and not having retrospective effect unless it is specifically provided. So, when there is no principal-agent relationship between the bank and the assessee, deduction of tax at source on commission or brokerage is not required for. Consequently, addition made by the AO and confirmed by the ld. CIT (A) is ordered to be deleted, thus the appeal filed by the assessee is hereby allowed.

Summary

Issues:
1. Disallowance of expenditure on bank guarantee commission.
2. Interpretation of CBDT Notification No. 56/2012.
3. Applicability of TDS under section 194H on bank guarantee commission.
4. Principal-agent relationship for invoking provisions of Section 194H.
5. Exemption under Section 194A(3)(iii) for bank guarantee commission.

Analysis:
1. The appellant sought to set aside the order passed by the Commissioner of Income-tax (Appeals) disallowing the expenditure on bank guarantee commission. The Assessing Officer disallowed the commission under section 14A (ia) of the Income-tax Act, 1961, as the new scheme effective from 01.01.2013 required TDS on such payments. The appellant contended that the order was contrary to facts and law.

2. The appellant argued that the CBDT Notification No. 56/2012 was misconstrued by the CIT(A) and that the scheme did not require TDS on the bank guarantee commission. The intention behind the notification was to reduce hardship for the deductee, which the CIT(A) failed to consider.

3. The Tribunal analyzed the issue of TDS under section 194H on bank guarantee commission. The appellant relied on a judgment stating that bank guarantee commission does not fall under TDS provisions. The Tribunal agreed, emphasizing the lack of a principal-agent relationship between the bank and the assessee, making TDS unnecessary.

4. The Tribunal reiterated that a principal-agent relationship is essential for invoking Section 194H. As the bank issuing the guarantee did not act as an agent for the assessee, TDS was not required. The nature of the bank guarantee commission was considered akin to interest, making it exempt under Section 194A(3)(iii).

5. The Tribunal referenced a prior judgment to support its decision, highlighting that the bank guarantee commission did not fit the definition of commission or brokerage under Section 194H. The decision was made based on the lack of a principal-agent relationship and the character of the payment as interest, leading to the deletion of the addition made by the Assessing Officer.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee and deleting the addition of bank guarantee commission, as the TDS provisions were not applicable due to the absence of a principal-agent relationship and the nature of the payment as interest.