TDS u/s. 194H – Commission paid to bank for issuing bank guarantee is not liable for TDS u/s. 194H
Facts:
The assessee was a company engaged in stock broking business and was a member of the BSE and NSE. During the course of business carried on by the assessee, it furnished bank guarantees, mainly in lieu of margin deposits, to various agencies, such as BSE and NSE. In consideration for issuance of such bank guarantees, banks charged the fees which was termed as bank guarantee commission. He further noted that the assessee has taken bank guarantees from various banks and these bank guarantees protect the stock exchanges from any default by the assessee and acts as security for due performance and fulfilment of obligations by the assessee. The bank guarantee commission paid by the assessee for these bank guarantees, according to the AO, was liable for deduction at source u/s. 194H. The assessee’s failure to deduct the tax source was, accordingly. visited with demands raised u/s. 201(1) r.w.s. 194H, to make good the shortfall in TDS and u/s. 201 (1A) r/w s. 194H, to compensate interest for delay in realizing the TDS revenues. Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the CIT(A) but without any success.
Held:
Even when an expression is statutorily defined u/s. 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act, unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the IT Act must depend on the context in which the expression is set out, and the context in which expression ‘commission’ appears in section 194H, i.e. along with the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to a payment in the nature of reward for effecting sales or business transactions etc.
The inclusive definition of the expression ‘commission or brokerage’ in Explanation to section 194H is quite in harmony with this approach. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. An inclusive definition does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, even an inclusive definition has to be treated as exhaustive. That is the situation in this case as well. Even as definition of expression ‘commission or brokerage’, in Explanation to section 194H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition.
Principal agent relationship is a sine qua non for invoking the provisions of section 194H. In the present case there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’. While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction is not a transaction between principal and agent so as to attract the tax deduction requirements u/s. 194H.
