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June 23, 2022

TDS on commission to credit card companies is not applicable under Section 194H

by CA Shivam Jaiswal in Income Tax

TDS on commission to credit card companies is not applicable under Section 194H

Facts and issues of the case

The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax  (Appeals)-XXXV, New Delhi (‘CIT(A)’ in short) dated 12.10.2017 arising from the assessment order dated  23.03.2016  passed  by the  Assessing Officer (AO) under Section 143(3) of the  Income Tax  Act,  1961 (the Act) concerning AY 2013-14.The grounds of appeal raised by the assessee reads as under:

On the facts and  circumstances  of  the  commissioner (Appeals) is wrong in disallowing a sum if Rs. 20,83, 340/- on account of Credit card commission under section 40(a)(ia) of the Income Tax Act.The Commissioner (Appeals) is wrong in treating Commissioner charged by credit card Company under  section 194H of the Income Tax Act.

  • The Commissioner (Appeals) is  wrong in  disallowing Rs. 83, 787/- on account of staff recruitment expenses.The  Commissioner (Appeals) has  failed to  take into account that even  after  including commission of  employees for  referral for their salary below the taxable limit.
  • The Commissioner (Appeals) is wrong  in  disallowing  a sum of Rs. 1, 53, 750/- on account of legal charges under section 40(a)(ia) of the Income Tax Act. On the facts of the expenses have  been  incurred  for  stamp paper and registration charges of the lease.”

Briefly stated, the assessee inter alia incurred a sum of Rs.20,83,340/- on account of credit card commission which was disallowed by the Assessing Officer under Section 40(a)(ia) r.w.s. 194H of the Act for non deduction of TDS on such payments. Similarly, the Assessing Officer also disallowed Rs.83,787/- on account of staff recruitment expenses paid to employees for non deduction of TDS  taking shelter of  Section 40(a)(ia) of  the  Act. The Assessing Officer also disallowed legal charges amounting to Rs.1,53,750/- under Section 40(a)(ia) r.w. Section 194J of the Act due to non deduction of TDS in the  assessment  framed  under Section 143(3) of the Act.In the first appeal, the  CIT(A) did  not  grant any  relief on such disallowances.Aggrieved,   the   assessee   preferred   appeal   before   the Tribunal.

Observation by the court

Court had considered the  rival  submissions,  perused  the orders of the lower authorities, case law cited and material placed on record.The first issue relates to disallowance of sum  of Rs.20,83,340/- on account of  credit card  commission  under Section 40(a)(ia) of the Act. It is the case of the assessee that provisions of Section 194H are not  attracted  having  regard  to nature of such expenses. It is contended that provisions of Section 194H casting obligation on the assessee to deduct  tax  at source arises only when a person acts on behalf of other person. In the present case, the commission is unilaterally retained by the credit card company. It cannot be said that bank acts on behalf of the merchant establishment or that  merchant  establishment  conducts the transaction for the bank. The sale made on the  basis of  credit card is merely a transaction by the merchant establishment and the credit card company only facilitates the electronic payment for a certain charge. The commission retained by  the  credit  card company is therefore akin to normal bank charges and not in the nature of commission/brokerage on behalf of the merchant establishment as envisaged under Section 194H of the Act.

The assessee thus contends that the so called commission retained by credit card company is not in the  nature of  commission contemplated under Section 194H of the Act and therefore the disallowance under Section 40(a)(ia) is uncalled for. A reference was made to the  judgment rendered by  Hon’ble Delhi  High  Court in the case of CIT vs. JDS Apparels Pvt.  Ltd.,  (2015)  53 taxmann.com 139 (Del.) wherein the Hon’ble  Delhi  High  Court held that commission to bank on payments received from customers who had made purchases through credit  cards  is not liable to TDS under Section 194H of the Act. It was noted  that banking services cannot be covered and  treated  as services rendered by  an agent for the principal during the course of buying and selling of goods as the  banker does  not  render any  service in the nature of agency. A reference was also made to the decision of the Co-ordinate Bench of Tribunal in ACIT vs. P.C. Jewellers Ltd.wherein it was reiterated that no obligation arises under Section 194H of the Act for the charges incurred for facilitating payment through  credit/debit  cards.  In view of  the  judgment rendered by the  Hon’ble Delhi High Court and applied by Co-ordinate Bench, we  do  not  see  any  reason to take a different view while adjudicating the issue in favour of the assessee. We also notice that the Assessing Officer himself has accepted the aforesaid decision in subsequent Assessment Year 2014-15 passed under Section 143(3) of the Act vide order dated 09.12.2016 wherein Assessing Officer did not dispute the position taken by the assessee for  non  deduction  of  TDS  payment  of service charges to banks situated in India such as HDFC Bank etc. (except for the credit/debit card charges pertaining to American Express Bank).

On behalf of the Revenue, it was contended that TDS is applicable on charges attributable to foreign banks in view of the press release dated 04.01.2013 issued by Government of India for allowability of payment without TDS of credit/debit  card commission on transactions between merchant establishment and acquirer banks.In view of the judgment in the case JDS Apparels Pvt. Ltd. (supra), the artificial distinction between charges attributable to foreign banks (American Express Bank herein) vis-à-vis bank situated in India, in our view, is not justified. Such differentiation made in the press release dated 04.01.2013 is not borne out  by judicial pronouncements. In consonance with the  judicial precedents, the Ground No.1 is allowed.Ground No.2 concerns disallowance  of  Rs.83,387/-  on account of staff recruitment expenses. The Assessing Officer disallowed the recruitment expenses on the  ground  that  no  TDS was deducted for such payments. It is  the case of  the assessee that the aforesaid payments of  Rs.83,387/-  is an aggregate sum incurred during the year and individual payments to  different persons are very small generally ranging between Rs.1500 to Rs.7500/- per person. The relevant details were placed at page 44- 45 of the paper book to support such contention.

On perusal thereof, we find merit in the plea of  the  assessee for non deduction of TDS on such payments below threshold limit provided under Section 194C of the Act.Ground no.2 of the assessee’s appeal thus deserves to be allowed.

Ground No.3 concerns disallowance of Rs.1,53,000/- on account of legal charges. In this regard, it  is contended on behalf of the assessee that such payments are made  primarily  towards stamp duty and registration charges of  various  lease  deeds  of stores during the Financial Year 2012-13 as tabulated at page no. 47 of the paper book. As  stated, the  assessee has  shared 50%  of such expenses which stands at Rs.1,53,750/-.The expenses incurred not  being  in the  nature of professional services but towards payment of government duty/fee/documentation charges, we see merit in the plea of the assessee for non deduction of TDS under Section 194J.Ground No.3 is thus allowed.

The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax  (Appeals)-XXXV, New Delhi (‘CIT(A)’ in short) dated 12.10.2017 arising from the assessment order dated  09.12.2016  passed  by the  Assessing Officer (AO) under Section 143(3) of the  Income Tax  Act,  1961 (the Act) concerning AY 2014-15.

As per grounds of appeal, the assessee has challenged the disallowance of Rs.2,95,609/- on account of  credit  card commission under Section 40(a)(ia) of the Act. The issue being identical to Ground No.1  in ITA  No.1289/Del/2018,  the conclusion arrived therein shall apply  mutatis  mutandis  to the issue raised in the captioned appeal.

Conclusion

The appeal of the assessee is allowed.In the combined result, both the appeals of the assessee are allowed by the court.

Global-Healthline-Pvt.-Ltd-Vs-ITO-ITAT-Delhi

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