No TDS u/s 194H on commission paid to banks on processing of credit card transactions

Pr. CIT Vs Hotel Leela Venture Ltd. (Bombay High Court)

Conclusion: Bank guarantee commission was not in the nature of commission paid to an agent but it was in the nature of bank charges for providing one of the banking service, therefore, the charge collected by bank for such service did not amount to commission within the meaning of section 194H and such commission could not be disallowed under section 40(a)(ia).

Held: Assessee was a company, engaged in the business of setting up of and operating of Deluxe Hotels. AO noticed that assessee had not deducted tax at source in terms of Section 194H in relation to commission paid to the banks on processing of credit card transactions. AO disallowed the corresponding expenditure by invoking section 40(a)(ia). It was held bank guarantee commission was not in the nature of commission paid to an agent but it was in the nature of bank charges for providing one of the banking service. The charge collected by bank for such service did not amount to commission within the meaning of section 194H and consequently, such commission could not be disallowed under section 40(a)(ia).

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

These Appeals arise from common background. We may, therefore, record facts from the Income Tax Appeal No.847 of 2016. Appeal is filed by the Revenue, challenging Judgment of the Income Tax Appellate Tribunal (for short “the Tribunal”), dated 19^th August, 2015. Following question was argued before us:-

“ Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified in upholding the deletion of disallowance Rs.1,96,68,165/­ under section 40a(ia) by the Tribunal without appreciating that the assessee had failed to deduct tax at source from commission paid to Banks for providing credit card services, in contravention of section 194H of the Act?”

2. The Respondent­Assessee is a Company, engaged in the business of setting up of and operating of Deluxe Hotels. While scrutinizing the Assessee’s return of income for the Assessment Year 2009-10, the Assessing Officer noticed that the Assessee had not deducted tax at source in terms of Section 194H of the Income Tax Act, 1961 (for short “the Act”), in relation to commission paid to the banks on processing of Credit Card Transactions. The Assessing Officer disallowed the corresponding expenditure of Rs.1,96,68,165/­ by invoking to Section 40(a)(ia) of the Act. In Appeal, the Commissioner of Income Tax [Appeals] (for short “CIT[A]), deleted disallowance, upon which the Revenue approached the Tribunal. The Tribunal by the impugned Judgment, dismissed the Revenue’s Appeal, relying upon its Judgment in case of the Assessee for the earlier Assessment Year. In such Judgment, the Tribunal had relied upon the decision of the Delhi High Court in the case of CIT v/s. JDS Apparels P. Ltd., reported in 370 ITR 454. The Tribunal held that, in the present case, the bank did not act as an agent of the Assessee while processing the credit card payments and, therefore, the charge collected by the Bank for such service, does not amount to commission within the meaning of Section 194H of the Act.

3. The decision of the Delhi High Court in the case of JDS Apparels P. Ltd., (supra) was also rendered in the background of the Revenue’s contention of breach of Section 194H of the Act in connection with the credit card charges. The Court, after analyzing the provisions contained in Section 194H of the Act, held and observed as under:­

“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 respondent­assessee. Once the payment was made by HDFC, it was received and credited to the account of the respondent­assessee. In the process, a small fee was deducted by the acquiring bank, i.e. the bank whose swiping machine was used. On swiping 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 realization of payment. Subsequently, the acquiring bank realized and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalfº of the respondent­assessee. The relationship between HDFC and the respondent­assessee 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 respondent­assessee. Thus, the respondent­assessee 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 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 rationable 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 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.”

4. In view of the decision of the Delhi High Court in JDS Apparels P. Ltd., (supra), we do not find that Tribunal has committed any error. No question of law arises.

5. In order dated 4^th December, 2018 in Income Tax Appeal No.769 of 2016, in somewhat similar circumstances, following observations were made:-

“ Learned counsel for the Revenue stated that the Revenue had filed an appeal against the judgment of the Tribunal in case of Kotak Securities Ltd., but that the appeal was withdrawn on the ground of low tax effect. He has, however, made available a copy of the judgment of the Tribunal in the said case which contains a detail discussion on the issue at hand. In the said judgment, the Tribunal referred to Section 194H of the Act which requires an assessee responsible for paying any income by way of commission or brokerage to deduct tax at source. The Tribunal was of the opinion that the words “commission or brokerage” must make colour from each other. The Tribunal was of the opinion that the payment in question, though categorized as “bank guarantee commission” is not strictly speaking payment of commission since there is no principal to agent relationship between the payer and the payee. The Tribunal, therefore, held that the requirement of deducting tax at source emanating from Section 194H of the Act in the present case does not arise. 

We are broadly in agreement with the view of the Tribunal. The so called bank guarantee commission is not in the nature of commission paid to an agent but it is in the nature of bank charges for providing one of the banking service. The requirement of Section 194H of the Act, therefore, would not arise. No question of law arises. The Income Tax Appeal is dismissed.”

6. Both the Appeals are dismissed.