No TDS u/s 194H Applicable on bank guarantee charges: ITAT

The assessee, Nippon Koei Co. Ltd., filed its Income Tax Return (ITR) for the assessment year 2021-22, reporting an income of Rs 6,27,12,098 for AY 2021-22. The case was selected for scrutiny, and an assessment order was issued by the AO under section 144C(1) of the Income Tax Act, making an addition of Rs 3,47,02,323. The assessee filed objections before the Dispute Resolution Panel (DRP), and based on the DRP directions under section 144C(5) on 28.09.2023, the AO made several disallowances. This included the disallowance of the lead role expenditure of Rs 19,58,509, the disallowance of payment made to M/s. Antony Burchell of Rs. 3,08,08,089, disallowance under section 44DA of the Act of Rs. 3,49,255, and disallowance under section 40(a) of the Act of Rs. 13,76,205. The total income was assessed at Rs 9,74,14,421, and total additions of Rs 3,47,02,323 were made.

Therefore, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Hyderabad. The assessee in Ground 1 explained about the disallowance of Rs 2,10,265 on interest paid under section 201(1A) for delay in depositing TDS, saying that it was compensatory in nature and is allowable as a business expenditure. The Tribunal cited the decision of the Madras High Court in the case of Chennai Properties & Investment Ltd. (supra), where it was concluded that the interest paid on delayed remittance of TDS cannot be considered as business expenditure. Following this decision, the tribunal upheld the disallowance of Rs 210,265 made by the AO.

In Ground 2, which related to the disallowance of Rs 3,08,08,089, the assessee submitted that the said payment was made to Mr Tony for the consultancy charges, as the services given by Mr Tony were purely consultancy, and the assessee has also discharged the GST under the Reverse Charge Mechanism on the payment. The assessee argued that the AO had wrongly classified the payment as salary. The Tribunal analysed the agreement between the assessee and Mr Tony and concluded that Mr Tony was the employee of the assessee, and the GST payment under RCM does not change this conclusion. Therefore, the tribunal agreed with AO, calling the payment a salary, and upheld the disallowance made by the Ld. AO, as the assessee had not deducted TDS on the said payment.

In ground no. 3, which was related to the disallowance of expenses under section 44DA, the assessee submitted that these expenses were the small amounts spent towards the reimbursement of expenses incurred by the staff of the Head Office located in Japan. But the assessee could not submit evidence before the AO, and the same was submitted before the DRP. The Tribunal noted that even after the evidence was submitted before the DRP, it failed to give any clear findings on the disallowance made by the AO. Therefore, this matter was remanded to the assessing officer for fresh consideration after giving the assessee an opportunity for a hearing.

In the Ground 4, where the disallowance was made towards the performance bond guarantee and bank guarantee charges, the assessee explained that these charges were incurred by the Head Office in Japan on behalf of the Indian Branch towards the charges paid to a lender in Japan against the funds available to the assessee in India, and the assessee reimbursed the same to its HO in Japan. The assessee argued that such payments are not commission or brokerage and are subject to TDS under section 194H. The tribunal agreed with the assessee and held that the payment made by the assessee for the performance bond guarantee and bank guarantee charges to the bank are not commission or brokerage, as there is no principal-agent relation between the assessee and the bank. Therefore, the disallowance of Rs 13,76,205 was directed to be deleted.

In Ground 5, the assessee challenged the initiation of penalty proceedings by the AO under section 270A of the Act. The assessee argued that the penalty proceedings are only consequential and a preliminary step. The tribunal held that the ground raised by the assessee at this stage is premature and does not survive for the adjudication at this stage, as the cause of action arises only when the penalty order is actually passed under section 270A. Therefore, this ground was deleted.