Un-necessary litigation by revenue: Guarantee commission is not paid to agent and is not ‘commission or brokerage’ for purpose of TDS u.s. 194H

[DEV KUMAR KOTHARI]

Un-necessary litigation by revenue:

Guarantee commission is not paid to agent and is not ‘commission or brokerage’ for purpose of TDS u.s. 194H

Judgments of Tribunal considered in this article:

M/S. NAVNIRMAN HIGHWAY PROJECT PVT. LTD. VERSUS DCIT, CIRCLE 18 (1) , NEW DELHI. [2019 (10) TMI 656 - ITAT DELHI]

KOTAK SECURITIES LIMITED VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, TDS CIRCLE 2(1), MUMBAI [2012 (2) TMI 77 - ITAT MUMBAI]

Provisions considered- S. 2(28A) – meaning of interest

                                      A.194H – about TDS on commission or brokerage

Subject matter of study - TDS under section 194H and related provisions:

Tax is deductible in some circumstances from Commission or brokerage payable/ paid/ credited to the account of payee. The provision is exhaustive and contains explanations of some terms. Besides, the provision is also to be looked into with the object of the same. The heading of section, words used therein are very clear and leaves no ambiguity about nature of commission or brokerage to which the provision apply. However, as usual, tax authorities are trying to invoke the provision for deduction of tax at source from guarantee commission also.

By demanding TDS, provisions of S.40 are also invoked to make a disallowance of guarantee commission paid due to failure to deduct and pay amount of TDS on guarantee commission.

This is leading to unjustified demands for TDS and for tax due to disallowance of Guarantee Commission.

In this write-up detailed discussion about applicability of provisions to various type of assesse, and exceptions and exemptions, procedures etc. are not discussed. These are of general nature about TDS and are well known by readers.

Guarantee commission:

Guarantee commission can be of different nature like performance guarantee, or guaranty for abstaining from doing some act.

In case of a guarantor, guarantor acts as principal and not an agent of person who pays guarantee commission.

 Whether,  it be guarantee commission paid to bank or others will not make difference. Guarantee commission is, generally,  not for selling or buying any goods or services and is also not  in relation to any transaction relating to any asset, valuable article or thing, not being securities.

Even in case of a transaction, in which a guarantor extends guarantee, about performance of products sold by another party or performance of party to execute contract satisfactorily, the guarantee contract is an independent contract, and guarantee commission paid is on principal to principal basis.  By common sense also a guarantor cannot generally be an agent of any of party.

A contract of guarantee is an independent transaction. Even in case of sale or purchase of goods, if a guarantee is provided by bank or other party for performance of the contract by any party, this guarantee will not be for buying and selling of goods.

Provisions (with highlights added by author):

Statutory Provisions

Income-tax Act, 1961

¹[Commission or brokerage.

194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ⁶[ five per cent. ] :

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed  ⁷[ fifteen thousand rupees ] :

³[Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed ⁸[one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section:]

⁴[Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.]

Explanation.-For the purposes of this section,-

(i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;

(ii) the expression "professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;

(iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.] 

 Definitions. [Clause (1) to Clause (15)]

 2. In this Act, unless the context otherwise requires,-

 ⁶⁷[ (28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;]

From highlighted portion of S.194H and on full reading of the section it is clear that the section is restricted in its scope and attempt to apply it for guarantee commission is not correct. Brokerage and commission are paid by principal to an agent. Whereas guarantee commission is paid to an independent party who, as a principal undertake to compensate the beneficiary, in case of failure of concerned party in performance of contract etc.

Tribunals have deleted demand of TDS and disallowances made u.s. 40 by holding that guarantee commission is not subject to TDs u.s. 194H

It has also been held that guarantee commission paid to bank is in nature of interest as defined u/s 2(28A) and for that reason also it has been held that S.194H is not applicable to guarantee commission.

Regarding ‘guarantee commission’ , though Tribunals have taken view that it is in nature of ‘interest’ , as defined in S.2(28A). This is a beneficial view taken by honorable Tribunal.

 However, with due respect, author differ in this regard. Interest can be any sum paid or payable to creditor, in respect of sum borrowed, credit facility granted, unutilized facility and any service charges or fees payable to creditor. For example, interest, penal interest,  loan processing fees, commitment charges, charges for unutilized borrowing powers,… etc. payable to loan creditor/ creditor or depositors are paid by borrower to lender, and are in nature of interest.

However, any owever,

 payment to a person other than creditor, cannot be considered ‘interest’ even within wider meaning of ‘interest’ as per S.2 (28A) and in commercial world.  

Editorial notes/ highlights of tmi, on two judgments of Tribunal are reproduced below with highlights added by author for further  analysis and key words. For the purpose of this article detailed facts are not necessary, however, for in-depth study, readers can refer to the reported judgments and judgments relied on therein. In the judgments relied on by Tribunals, various legal issues and rules of interpretation are referred. However, author feels that in view of clear provisions and general understanding about ‘commission and brokerage’ it is can be said that guarantee commission is not ‘commission or brokerage’ in context of S.194H and in commercial parlance.