Section 194H: TDS not applicable on Bank guarantee commission

DCIT Vs. Delta Constructions Ltd. (ITAT Hyderabad)

Assessee contends that in order to invoke the provisions of section 40(a)(ia) it has to be shown that the payment made by the assessee is attracted by the provisions of section 194H of the Act i.e., there is liability to deduct tax at source on the bank guarantee commission payable whereas on the same issue the CBDT has issued Notification which exempts from deduction of tax. Though the Notification speaks of applicability of the clarification from 4-1-2013 the fact remains that there are number of decisions of various Benches of ITAT in favour of the assessee, even prior to the Notification and thus the Notification merely clarifies the issue and thus applicable retrospectively. At any rate, in the light of the following decisions, the only view possible in this matter is the provisions of section 194H is not applicable to the payments made to bank since it is not in the nature of “commission”, as it is understood in common business parlance and in the context of provisions of section 194H of the Act. In other words, it is not a transaction between ‘principal and agent’ so as to invoke the provisions of section 194H of the Act.

Full Text of the ITAT Order is as follows:-

The appeal filed by the Revenue and the Cross Objection filed by the assessee are directed against the order passed by the learned Commissioner (Appeals)-5, Hyderabad.

2. The facts concerning the only issue in dispute centres around the facts stated below. Assessee is engaged in the civil construction. The assessee incurred certain expenditure under the head ‘bank guarantee charges’ on which tax was not deducted at source. The assessing officer was of the opinion that the TDS has to be made as required under section 194H of the Act. Consequently, provisions of section 40(a)(ia) of the Act are invoked. The case of the case of the assessee, on the other hand, was that section 194H is not applicable since there is no ‘principal and agent’ relationship between the assessee and the bank. Reliance was placed upon the CBDT notification dated 4-1-2013 which grants exemption from TDS on the payments made towards bank guarantee commission. It was also contended that section 40(a)(ia) of the Act is applicable only when the amount is ‘payable’ whereas in the instant case, the amount was already ‘paid’ to the bank and in this regard relied upon the decision of the ITAT, Visakhapatnam Special Bench in the case of Merilyn Shipping and Transport Ltd. v. ACIT (16 ITR 1).

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