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December, 08th 2014

+                  INCOME TAX APPEAL NO. 608/2014

                                   Reserved on: 30th September, 2014
 %                               Date of Decision: 18th November, 2014

        THE COMMISSIONER OF INCOME TAX-II            ..... Appellant
                     Through Mr. Rohit Madan, Sr. Standing Counsel.


         JDS APPARELS PRIVATE LIMITED              ..... Respondent
                       Through Mr. Sanat Kapoor & Mr. Varun Gupta,



        This appeal by the Revenue under Section 260A of the Income Tax

Act, 1961 (,,Act, for short) impugns the finding recorded by the Income

Tax Appellate Tribunal (,,Tribunal, for short) in their order dated 7th

February, 2014 that the respondent-assessee, JDS Apparels Private Limited

had not violated Section 194H of the Act. As a consequence, it has been

held that the Assessing Officer was wrong in invoking Section 40(a)(ia) of

the Act and accordingly had erred in making addition of Rs.44,65,654/-,

i.e. the charges deducted by M/s HDFC Bank Ltd (,,HDFC, for short) on

the payments made through credit cards.

ITA No. 608/2014                                                 Page 1 of 15
2.      The respondent-assessee had for the Assessment Year 2009-10 filed

a return on 30th November, 2009 declaring income of Rs.4,91,69,380/-,

which was made subject matter of scrutiny assessment under Section

143(3) of the Act vide order dated 16th December, 2011. The assessment

order records that the respondent-assessee was engaged in the business of

trading in readymade garments. A letter was received from the Assessing

Officer, TDS Circle Mumbai that the respondent-assessee had paid

"commission" to HDFC on payments received from customers who had

made purchases through credit cards. Survey under Section 133A of the

Act had been conducted on HDFC, who had provided card swiping

machines to retail merchants, including the respondent-assessee. A credit

card holder could make payment by swiping the credit card on the said

machines. The details of the bill amount, etc. were thereupon forwarded to

the acquiring bank, which is the bank which had provided the machine, i.e.

HDFC in this case, which then made payment to the respondent assessee.

The payment made to the respondent-assessee was after withholding or

deducting the fee payable to HDFC. Thereafter, the acquiring bank, i.e.

HDFC recovered the bill amount from the issuing bank of the customer.

3.      The Assessing Officer held    that   the   amount earned by the

acquiring bank, i.e. HDFC in this case, was in the nature of "commission"

and should have been subjected to deduction of tax at source @ 10% under

ITA No. 608/2014                                                 Page 2 of 15
Section 194H of the Act. As the commission had not been subjected to tax

at source, Rs.44,65,654/- should be disallowed under Section 40(a)(ia) of

the Act, as this amount had been claimed as an expenditure by the assessee.

4.      The aforesaid opinion was affirmed by the Commissioner of Income

Tax (Appeals), who held that the transaction in question was in the nature

of bill discounting by the acquiring bank, who had paid the bill amount

after deducting the commission payable to them. The acquiring bank had

taken up the entire risk relating to recovery of payment from the issuing

bank. Reference was made to the following portion of the Circular No.619

dated 4th December, 1991, issued by the Central Board of Direct Taxes


          "For the purpose of this Section commission or brokerage
          includes any payment received or receivable directly by person
          acting on behalf of another person for services in the course of
          buying of selling of the goods or in relation to any transaction
          relating to any assets, value, article or thing."

5.      As noticed above, the Tribunal has held that Section 194H of the Act
is not applicable.
6.      Section 194H of the Act reads as under:-
          "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 ten per cent :
ITA No. 608/2014                                                     Page 3 of 15
          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 five thousand
          rupees :

          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 the monetary
          limits specified under clause (a) or clause (b) of section
          44AB 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

          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
          (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
ITA No. 608/2014                                                       Page 4 of 15
          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."

7.      Section 194H of the Act applies to income by way of commission or

brokerage excluding insurance commission referred to in Section 194D of

the Act. Tax at source is to be deducted 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 way of cheque/draft or any other mode. The explanation clause

(i) states that for the purpose of this section, commission or brokerage

includes any payment received or receivable directly or indirectly by a

person acting on behalf of another person, (i) for services rendered, not

being in the nature of professional services; (ii) any service rendered in the

course of buying or selling of goods; and, (iii) in relation to any transaction

relating to any asset, valuable article or thing, not being securities. The

expression ,,securities has been defined clause (iii) to the Explanation.

8.      The High Court of Gujarat in Ahmedabad Stamp Vendors

Association versus Union of India [2002] 257 ITR 202 examined clause

(i) of the explanation and whether it would be applicable to persons

carrying on the business of stamp vendors who purchase stamps from the

government treasury and sell them to the public. The Gujarat High Court

drew a distinction between a contract of sale and a contract of agency by

which an agent is authorized to buy or sell on behalf of the principal. In a
ITA No. 608/2014                                                     Page 5 of 15
case of agency, the agent is not the owner of the property and does not sell

the same of his own accord but as per the directions and instructions of the

principal, who is the owner of the property. The profit and loss is that of

the principal, and what is paid to the agent is the commission or brokerage.

The expressions "commission" and "discount" were distinguished after

making reference to the definitions in the Blacks Law Dictionary. The

expression "discount", it was observed, is an allowance or deduction made

from the gross sale on any account whatsoever. A "deduction" normally

represents a reduction in the original price or a debt such as in case of

securities (e.g. treasury bills), which are issued below the face value and

are redeemed at the face value. Commission, it was held, is a reward paid

to an agent as well as to a salesman, executor, trustee, broker or bailee and

is calculated as a percentage of the amount of the transaction or on the

profit of the principal. It is a fee paid to an agent or an employee for

generating a piece of business or performing a service. In such cases,

normally, there exists a fiduciary duty, which has to be discharged by the

person to whom commission is paid. The following excerpt from the

decision of the Bombay High in Harihar Cotton Processing Factory

versus CIT, (1960) 391 ITR 594 (Bom.) was referred to with approval:-

          "The expression "commission" has no technical meaning but
          both in legal and commercial acceptation of the term it has
          definite signification and is understood as an allowance for
          service or labour in discharging certain duties such as for
ITA No. 608/2014                                                   Page 6 of 15
          instance of an agent, factor, broker or any other person who
          manages the affairs or undertakes to do some work or renders
          some service to another. Mostly it is a percentage on price or
          value of upon the amount of money involved in a transaction.
          It can be for a variety of services and is of the nature of
          recompense or reward for such services. "Rebate", on the other
          hand, is a remission or a payment back and of the nature of a
          deduction from the gross amount. It is sometimes spoken of as
          a discount or a draw-back. The dictionary meaning of the term
          includes a refund to the purchaser of a thing or commodity of a
          portion of the price paid by him. It is not confined to a
          transaction of sale and includes any deduction or discount
          from a stipulated payment, charge or rate. It need not
          necessarily be taken out in advance of payment but may be
          handed back to the payer after he has paid the stipulated sum.
          The repayment need not be immediate. It can be made later
          and in case of persons who have continuous dealings with one
          another it is nothing unusual to do so."
Importantly, the Gujarat High Court held that there should be an element of

agency in all the three situations as envisaged in clause (i) of the

Explanation to Section 194H of the Act.

9.      On appeal before the Supreme Court, the decision was upheld by a

short order, which is reported as (2012) 348 ITR 378 (SC), observing that

the stamp vendors had purchased stamps in bulk and had received a cash

discount. The Supreme Court concurred with the judgment of the High

Court that the transaction was of sale and Section 194H of the Act had no

application. Thus, holding that a contract of agency did not exist.

ITA No. 608/2014                                                      Page 7 of 15
10.     Similar view has been expressed by the Kerala High Court in Kerala

State Stamp Vendors Association versus Office of the Accountant

General and Others (2006) 282 ITR 7 (Kerala), wherein it held:-

          "No doubt, payment of commission or brokerage in relation to
          sale or purchase of goods also would attract deduction of tax at
          source under section 194H of the Act. However, such situation
          arises only when there is involvement of services of a third
          party on payment other than the seller and the purchaser of
          goods or when the recipient of the benefit markets goods as
          "agent" of the owner and not as independent dealer."
11.     Allahabad High Court in Chief Treasury Officer versus Union of

India (2013) 355 ITR 484 has held that the words "by a person acting on

behalf of another person" imply element of agency and must be present in

all such services or transactions in order to fall within the expression

"commission" and "brokerage". Reference was made to definition of the

term "agent" in the Indian Contract Act and the implication thereof and it

was observed that the contract between a principal and an agent primarily

is a contract of employment to bring about a legal relationship with a third

party and the agent either actually or by law is held to be authorized or

employed by the first i.e. the principal, whom he represents. Representative

character and derivative authority are distinguishing features of an agent. It

was accordingly held that provisions of Sections 194H of the Act were not

attracted in the case of stamp vendors.

ITA No. 608/2014                                                     Page 8 of 15
12.     The expressions "commission" or "brokerage" are words of general

and common parlance used both commercially and by the common man on

the street. Clause (i) expressly seeks to define the expression "commission"

or "brokerage" but states that it will include payments received or

receivable, directly or indirectly by a person acting on behalf of another if

they fall in the three categories. A definition may be exhaustive or

restrictive of its common meaning or may be an extensive one. Indeed,

there are decisions which observe that use of the word "includes" in the

clause can show legislative intent to enlarge the meaning of the words or

phrases occurring so as to not only mean and comprehend such things as

they signify according to their nature and import, but also things which the

interpretation clause declares that they shall include. (see CIT versus Taj

Mahal Hotel, (1971) 3 SCC 550). But, this may not always be the case and

in certain cases, the expression "includes" has been construed as

"equivalent to" and, therefore, given a narrower meaning (see South

Gujarat Roofing Tiles Manufacturers Association versus State of Gujarat

and Others AIR 1977 SC 90). Thus, the word "includes" can be used in the

sense of the word "means". The definition clause in such cases is treated

as an exhaustive one (see Reserve Bank of India versus Peerless General

Finance and Investment Company Ltd. (1987) 1 SCC 424). Thus, in a

ITA No. 608/2014                                                   Page 9 of 15
particular context the word "includes" when used , may only mean

"comprise of" or "consist of".

13.     It is apparent from the decision of the Supreme Court in the case of

Ahmedabad Stamp Vendors Association (supra) that clause (i) of the

Explanation to Section 194H of the Act has been read as exhaustive and

not as expansive. This is the reason why the Supreme Court in the short

order drew distinction between a transaction of sale and a contract of

agency and also between discount and commission/brokerage. Otherwise,

the expression "any service rendered in the course of buying or selling of

goods" possibly would have encompassed and included the "discount"

given to the stamp vendors, who render service during the course of buying

and selling of goods, i.e. the stamp papers.

14.     Contention could be raised that payment received or receivable

directly or indirectly for any services in course of buying or selling of

goods need not arise out of a contract of agency or from a relationship of a

principal and an agent. The said contention has to be rejected in view of the

aforesaid judgments, which positively hold that the three separate

conditions when tax at source is required to be deducted would only apply

provided the recipient is acting on behalf of another, i.e. relationship of a

principal and an agent exists and not otherwise. This interpretation has

been consistent and uniformly applied while interpreting clause (i) of the
ITA No. 608/2014                                                   Page 10 of 15
Explanation to Section 194H of the Act. Appropriate in this regard would

be to refer to the decision of the High Court of Delhi in Commissioner of

Income Tax versus Idea Cellular Limited, (2010) 325 ITR 148 (Delhi)

wherein Explanation clause (i) to Section 194H of the Act had come up for

consideration and on interpretation it was held that it would apply only if

payment was received or receivable directly or indirectly by a person

acting on behalf of another person for (i) services rendered (not being

professional) and (ii) for any services in the course of buying or selling of

goods or in relation to any transaction relating to an asset, valuable article

or thing. The judgment records that the counsel for both the parties, i.e. the

Revenue and the assessee, had agreed that the element of agency was to be

established in all the aforesaid circumstances (see page 156 placitum 9 of

the ITR citation). Thus, this contention if raised would not stand judicial

scrutiny on the principles of consistency and certainty. Even otherwise, the

view expounded and accepted is plausible, besides being reasonable.

15.     Applying the above cited case law to the factual matrix of the

present case, we feel that Section 194H of the Act would not be attracted.

HDFC was not acting as an agent of the respondent-assessee. Once the

payment was made by HDFC, it was received and credited to the account

of the respondent-assessee. In the process, a small fee was deducted by the

acquiring bank, i.e. the bank whose swiping machine was used. On swiping

ITA No. 608/2014                                                    Page 11 of 15
the credit card on the swiping machine, the customer whose credit card was

used, got access to the internet gateway of the acquiring bank resulting in

the realisation of payment. Subsequently, the acquiring bank realised and

recovered the payment from the bank which had issued the credit card.

HDFC had not undertaken any act on "behalf" of the respondent-assessee.

The relationship between HDFC and the respondent-assessee was not of an

agency but that of two independent parties on principal to principal basis.

HDFC was also acting and equally protecting the interest of the customer

whose credit card was used in the swiping machines. It is noticeable that

the bank in question or their employees were not present at the spot and

were not associated with buying or selling of goods as such. Upon swiping

the card, the bank made payment of the bill amount to the respondent-

assessee. Thus, the respondent assessee received the sale consideration. In

turn, the bank in question had to collect the amount from the bankers of the

credit card holder. The Bank had taken the risk and also remained out of

pocket for sometime as there would be a time gap between the date of

payment and recovery of the amount paid.

16.     The amount retained by the bank is a fee charged by them for having

rendered the banking services and cannot be treated as a commission or

brokerage paid in course of use of any services by a person acting on

behalf of another for buying or selling of goods. The intention of the

ITA No. 608/2014                                                  Page 12 of 15
legislature is to include and treat commission or brokerage paid when a

third person interacts between the seller and the buyer as an agent and

thereby renders services in the course of buying and/or selling of goods.

This happens when there is a middleman or an agent who interacts on

behalf of one of the parties, helps the buyer/seller to meet, or participates in

the negotiations or transactions resulting in the contract for buying and

selling of goods. Thus, the requirement of an agent and principal

relationship. This is the exact purport and the rationale behind the

provision. The bank in question is not concerned with buying or selling of

goods or even with the reason and cause as to why the card was swiped. It

is not bothered or concerned with the quality, price, nature, quantum etc. of

the goods bought/sold. The bank merely provides banking services in the

form of payment and subsequently collects the payment. The amount

punched in the swiping machine is credited to the account of the retailer by

the acquiring bank, i.e. HDFC in this case, after retaining a small portion of

the same as their charges. The banking services cannot be covered and

treated as services rendered by an agent for the principal during the course

of buying or selling of goods as the banker does not render any service in

the nature of agency.

17.     Another reason why we feel Section 40(a)(ia) of the Act should not

have been invoked in the present case is the principle of doubtful

ITA No. 608/2014                                                      Page 13 of 15
penalization which requires strict construction of penal provisions. The

said principle applies not only to criminal statutes but also to provisions

which create a deterrence and results in punitive penalty. Section 40(a)(ia)

is a deterrent and a penal provision. It has the effect of penalising the

assessee, who has failed to deduct tax at source and acts to the detriment of

the assessees property and other economic interests. It operates and

inflicts hardship and deprivation, by disallowing expenditure actually

incurred and treating it as disallowed. The Explanation, therefore, requires

a strict construction and the principle against doubtful penalization would

come into play. The detriment in the present case, as is noticeable, would

include initiation of proceedings for imposition of penalty for concealment,

as was directed by the Assessing Officer in the present case. The aforesaid

principle requires that a person should not be subjected to any sort of

detriment unless the obligation is clearly imposed. When the words are

equally capable of more than one construction, the one not inflicting the

penalty or deterrent may be preferred. In Maxwells The Interpretation of

Statutes, 12th edition (1969) it has been observed:-

          "The strict construction of penal statutes seems to manifest
          itself in four ways: in the requirement of express language for
          the creation of an offence; in interpreting strictly words setting
          out the elements of an offence; in requiring the fulfilment to
          the letter of statutory conditions precedent to the infliction of
          punishment; and in insisting on the strict observance of
          technical provisions concerning criminal procedure and
ITA No. 608/2014                                                       Page 14 of 15
18.     The aforesaid principles and interpretations can apply to taxing

statutes. In the present case we further feel the said principle should be

applied as HDFC would necessarily have acted as per law and it is not the

case of the Revenue that the bank had not paid taxes on their income. It is

not a case of loss of revenue as such or a case where the recipient did not

pay their taxes.

19.     In these circumstances, we do not find any merit in the present

appeal and the same is dismissed.

                                                   SANJIV KHANNA, J.

                                               V. KAMESWAR RAO, J.
NOVEMBER 18 , 2014

ITA No. 608/2014                                                 Page 15 of 15
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