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.