INCOME TAX ACT, 1961

--Tax deduction at source--Under section 194HPayment of guarantee commission to bank --During the course of business carried on by the assessee, the assessee 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, bank charged the fees, which was termed as, 'bank guarantee commission'. It was noticed that the assessee was not deducting any tax at source from the payments made by the assessee to the banks in respect of 'bank guarantee commission'. It was submitted by the assessee that a plain reading of Explanation to section 194H, which deals with deduction of tax source from commission or brokerage payments, indicates that the element of agency is essential in case of all the services or the transactions contemplated by Explanation to section 194H, and that the transactions or services, which are on principal to principal basis, would not be governed by the said provision requiring tax deduction at source. Held: There was 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 was to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it was in consideration of this commitment, the bank charges a fees which is customarily termed as 'bank guarantee commission'. While it was termed as 'guarantee commission', it was not in the nature of 'commission' as it was understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, was not a transaction between principal and agent so as to attract the tax deduction requirements under section 194H.

When we look at the connotations of expression 'commission or brokerage' in its cognate sense, as in the light of the principle of noscitur a sociis as we are obliged to, in our considered view, scope of expression 'commission', for this purpose, will be confined to 'an allowance, recompense or reward made to agents, factors and brokers and others for effecting sales and carrying out business transactions' and shall not extend to the payments, such as 'bank guarantee commission', which are in the nature of fees for services rendered or product offered by the recipient of such payments on principal to principal basis. Even when an expression is statutorily defined under section 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words In this Act (i.e. Income Tax 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 in set out, and the context in which expression 'commission' appears in section 194H, i.e. alongwith the expression 'brokerage', significantly restricts its connotations. The common parlance meaning of the expression 'commission' thus does not extend to a payment which was in the nature of fees for a product or service; it must remain restricted to, as has been elaborated above, 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 was quite in harmony with this approach as it only provides that 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” was includible in the scope of meaning of 'commission or brokerage'. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression 'commission or brokerage'. In the case of South Gujarat Roofing Tiles Manufacturers Association v. State of Gujarat (1976) 4 SCC 601 (SC), Hon'ble Supreme Court were in seisin of a situation in which an expression, namely 'processing', was given an inclusive definition, but Their Lordships were of the view that there could be no other meaning of 'processing' besides what was stated as included in that expression” and that Though 'include' was generally used in interpretation clause as a word of enlargement, in some cases context might suggest a different intention'. Their Lordships then concluded that though the expression used in the definition clause is 'includes', it seems to us that the word 'includes' has been used here in the same sense of 'means'; this was the only construction that the word can bear in this context”. In other words, an inclusive definition, as Their Lordships noted, does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, in our considered view, even an inclusive definition has to be treated as exhaustive. That is the situation in the case before us as well. Even as definition of expression 'commission or brokerage', in Explanation to section 194H, was stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition. Therefore, as held by the coordinate benches in a number of cases including SRL Ranbaxy Ltd v. ACIT (ITA No. 434/Del/ll; order dt. 16-12-2011), Fosters India Ltd. v. ITO (2008) 117 TTJ 346 (Pune) : 2008 TaxPub(DT) 1954 (Pune-Trib) and Ajmer Zila Dugdh Utpadak Sangh Ltd. v. ITO (2009) 34 SOT 216 (JP) : 2009 TaxPub(DT) 1947 (Jp-Trib), principal agent relationship is a sine qua non for invoking the provisions of section 194H. In the case before us, there was 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 was in consideration of this commitment, the bank charges a fees which is customarily termed as 'bank guarantee commission'. While it was termed as 'guarantee commission', it was not in the nature of 'commission' as it is understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, is not a transaction between principal and agent so as to attract the tax deduction requirements under section 194H. We are, therefore, of the considered view that the CIT(A) indeed erred in holding that the assessee was indeed under an obligation to deduct tax at source under section 194H from payments made by the assessee to various banks. As we have held that the assessee was not required to deduct tax at source under section 194H, the question of levy of interest under section 201(1A) cannot arise. [Para 9] In view of the above discussions, we quash the impugned demands under section 201(1) and 201(1A) rule with section 194H. We, therefore, also see no need to deal with other peripheral legal issues raised by the assessee. [Para 10]