* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ 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.
Versus
JDS APPARELS PRIVATE LIMITED ..... Respondent
Through Mr. Sanat Kapoor & Mr. Varun Gupta,
Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J.:
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.
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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
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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
(CBDT):-
"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 :
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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
section:
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
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
jurisdiction."
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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.
th
NOVEMBER 18 , 2014
VKR
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