One Mobikwik Systems Ltd. Vs JCIT (OSD) (ITAT Delhi)
Payment Gateway Is a Service Provider, Not an Agent: No TDS u/s 194H on Gateway Charges Paid to CC Avenue & Zaakpay
The Delhi ITAT has held that payment gateway charges paid by an e-wallet company to payment gateway service providers cannot be treated as commission or brokerage liable for TDS u/s 194H where the parties operate on a principal-to-principal basis. Since the payment gateways were independent service providers and did not act as agents of the assessee, the assessee could not be treated as an assessee-in-default u/s 201 and 201(1A).
One Mobikwik Systems Ltd. was authorised by the RBI to operate a payment system involving prepaid instruments described as a Stored Value Card Wallet. Customers used Mobikwik’s application to undertake transactions, which were processed with the assistance of payment gateway companies. For this purpose, Mobikwik availed the services of CC Avenue and Zaakpay Payment Services Pvt. Ltd.
During a TDS survey conducted u/s 133(2A) on 07.11.2017, the Department noticed that Mobikwik had not deducted tax from the payments or charges retained by these payment gateway companies. The AO treated the amounts as commission within the meaning of Section 194H, holding that the payment gateways were acting on behalf of Mobikwik and that a principal-agent relationship existed between them.
Consequently, the AO passed orders u/s 201 and 201(1A), treating Mobikwik as an assessee-in-default. For AY 2015-16 alone, a demand of ₹19,82,522 was raised. Similar demands were raised for AYs 2016-17 & 2017-18. The CIT(A) confirmed the demands on the reasoning that the payment gateway companies were acting on behalf of the assessee.
Before the Tribunal, Mobikwik relied upon the contractual agreements entered into with the payment gateway service providers. The agreements specifically recorded that the parties were independent contracting parties and that no relationship of principal & agent existed between them. The payment gateways provided transaction-processing facilities, charged their own fees and remitted the balance amount to Mobikwik after deducting their contractual charges.
The assessee explained that the payment gateways had no authority to represent or bind Mobikwik in dealings with third parties. They did not procure customers, negotiate transactions or participate in the buying or selling of goods or services. There was also no control or supervision of the nature ordinarily found in an agency relationship. The fact that the agreements contained indemnity clauses did not convert the relationship into one of agency because such clauses are a standard commercial mechanism for allocating risk between independent parties.
The Tribunal observed that the existence of a legal relationship of principal & agent is a sine qua non for applying Section 194H. The mere fact that one party facilitates a transaction or renders a service to another does not automatically make the service provider an agent.
Reliance was placed upon the Supreme Court decision in Bharti Cellular Ltd., wherein it was explained that the expression “acting on behalf of another person” postulates a legal relationship of principal & agent. The essential feature of an agency is the agent’s legal power to alter the principal’s relationship with a third party. Other relevant indicators include the principal’s control over the agent, the existence of a fiduciary relationship and the agent’s obligation to render accounts to the principal.
Applying these tests, the Tribunal found that CC Avenue and Zaakpay did not possess any authority to alter Mobikwik’s legal relationship with its customers. They merely provided the technological and transactional infrastructure necessary for processing payments. The relationship was, therefore, one between independent principals and not between a principal and an agent.
The Tribunal also relied upon the Delhi High Court ruling in PCIT v. MakeMyTrip India Pvt. Ltd. [2019] 104 taxmann.com 263, which held that charges collected by a payment gateway constitute fees for services and not commission. A payment gateway merely facilitates the payment between two principals and does not act as an intermediary or agent in the underlying purchase or sale transaction.
Reference was also made to JDS Apparels Pvt. Ltd., where the Delhi High Court held that the amount retained by a bank for processing card payments was a fee for banking services. The bank was neither concerned with the quality, price or nature of the goods sold nor involved in negotiations between the buyer and seller. Accordingly, the charges could not be treated as commission paid to an agent.
Similarly, the Karnataka High Court in Corporation Bank had held that the relationship between the participating banks in card transactions was on a principal-to-principal basis and that Section 194H was not attracted. The Tribunal also referred to the Bangalore ITAT decision in Knowledge Hut Solutions Pvt. Ltd., which specifically held that payments made to payment gateway providers such as Razorpay and Avenue India were not brokerage or commission liable for TDS u/s 194H.
The assessee had additionally relied upon CBDT Notification No. 47/2016 dated 17.06.2016, which exempts specified payments, including certain credit and debit card commission, from TDS. It contended that payment gateway charges were similar in character to such card-processing charges. The Tribunal accepted that the assessee’s case was supported by the judicial decisions as well as the CBDT notification discussed in the order.
Accordingly, the ITAT held that the provisions of Section 194H read with Sections 201 & 201(1A) were not attracted. The demands raised for all three assessment years were deleted and the assessee’s appeals were allowed.
A 2,208-Day Delay That Did Not Defeat the Appeal
For AYs 2016-17 & 2017-18, there was a delay of 2,208 days in filing separate appeals. Initially, the assessee had filed one composite Form 36 covering all three assessment years because the CIT(A) had passed a common order. When separate appeals were subsequently advised, the assessee filed them independently.
The Tribunal accepted that the original composite appeal was filed bona fide and that the delay was neither intentional nor wanton. It also noticed decisions recognising the practice of filing composite appeals against a common order. The substantial delay was, therefore, condoned and the appeals were decided on merits.
Author’s Comment
The ruling makes an important distinction between a commission agent and a technology-based payment facilitator. Every deduction or retention made while settling a transaction does not become commission u/s 194H. The decisive question is whether the recipient acts “on behalf of” the payer and has the legal ability to represent or bind the payer in dealings with third parties.
Payment gateways such as CC Avenue, Zaakpay, Razorpay, PhonePe or Paytm may provide different services under different contractual arrangements. Therefore, the exact agreement and operating model should always be examined. Nevertheless, where the payment gateway merely processes transactions for a predetermined fee, operates independently and has no authority to conclude or negotiate the underlying transaction, the charges bear the character of service fees rather than commission.
The ruling is principally founded on the absence of a principal-agent relationship. The reference to CBDT Notification No. 47/2016 provides additional support, but the stronger and more generally applicable proposition is that Section 194H itself fails where the payment gateway acts as an independent contractor on a principal-to-principal basis.
FULL TEXT OF THE ORDER OF ITAT DELHI
These three appeals, preferred by the assessee for assessment year 2015-16 – 2017-18, are directed against the combined order of Commissioner of Income-Tax (Appeals)-1, Gurgoandated 09.10.2018 in appeal No. 589- 591/17-18 against the order u/s 201 and 201(1A) passed by the Joint Commissioner of Income Tax(OSD), TDS Circle, Gurgaon). The reference to the word “Act” in this order hereinafter shall mean the Income Tax Act, 1961 as amended from time to time.
2.0 It has been noted that there is a delay of 2208 days in respect of appeals no.273-274/Del/2025 for AY-2016-17 & 2017-18 in filing of these appeals before the tribunal. In its affidavit the assessee has pleaded that in this case the Ld.CIT(A) had passed a common order for assessment years 2015-16 to 2017-18 confirming, the orders of the Ld.AO passed u/s u/s 201 and 201(1A) of the Act and accordingly the assessee had contested the impugned order by filing a common appeal through Form-36 for all the three years vide ITA No.7830/Del/18 dated 07.12.2018. It was contended that there was no challenge to the impugned filing by the registry. However, during the course of hearing, the fact of joint filing was noticed and appellant was advised to file separate appeals. Consequently, appeals for AY-2016-17 and 2017-18 were delinked and appeals vide ITA nos.273/Del/2025 and 274/Del/2025 for AY-2016-17 & 2017-18 respectively were filed. All these activities contributed to the delay which was neither willful nor wanton. It is the case of the assessee that its act of joint filing is well recognized practice in filing of appeals before the tribunals and which has the support from Hon’ble High Courts as well as ITAT. Reference was invited to the decision of Hon’ble Bombay High Court in the case of BDA Limited as at 153 taxmann.386 wherein it was held that filing of composite appeals does not suffers from any deficiency. Similarly, reliance was also placed upon the decision of Hon’ble Uttara Khand High Court in the case of Transocean Offshore International Ventures Limited 20 taxmann.com 737, of ITAT Bangalore in the case of JCR Drill Sol Pvt Ltd 164 taxmann.com 283 ruling on similar lines. The Ld.Counsel for the assessee argued that even though assessee’s case of original filing of a composite appeal was supported by judicial precedents, as a matter of abundant precaution, it chose to, upon being advised by the Bench, file separate appeals albeit with a delay of about 2208 days. The assessee submitted that there will not be case of any non-compliance now. We have considered the justification put forth by the assessee and we are satisfied with their adequacy. We are also conscious of the fact that no litigant gains by intentionally delaying its own matters. The Ld. DR did not pose any serious objections to the delay. Accordingly, we hereby condone the delay and proceed to adjudicate this appeal.
3.0 All the three appeals are revolving around a common issue and hence were heard together and are being adjudicated by this common order. The appeal vide ITA No.7830 for AY-2015-16 is taken as lead year for factual analysis. The decision taken therein shall apply mutatis mutandis to ITA Nos. 273 & 274 for AY’s-2016-17 & 2017-18 respectively.
4.0 The only issue contested in the present appeal qua ITA No.7830 / Del / 2025, through its grounds of appeal are regarding the action of the Ld.AO in invoking provisions of section 201 and 201(1A) in the case of the assessee holding it as an assessee in default for not deducting TDS on commission payments allegedly made u/s 194H.
5.0 At this stage we deem it necessary to recapitulate brief factual matrix of the case as discerned from the order of lower authorities. A survey under TDS provisions u/s 133 (2A) was conducted upon the assessee on 07.11.2017. The assessee company has been granted permission by the RBI for operating a payment system for issuance and operation of prepaid instruments in India known as “Stored Value Card Wallet” where customers are provided payment facilities in connection with their stored value wallets maintained with the appellant. Thus, mobikwik is an e-wallet service provider company that processes the transaction that a customer undertakes through its installed App with the assistance of payment Gateways (PG) companies. In continuance of its business, the assessee uses two payment gateways company namely CC Avenues and Zaaki payment services pvt ltd. During the course of survey, it was noted that payments made to CC Avenues and Zaaki payment services pvt ltd were not exposed to TDS. The Ld.AO held that the payments made by the assessee fell within the mischief of section 194H as commission payment and hence liable for deduction of TDS. Rejecting arguments of the assessee that RBI regulations, CBDT notification no.47 / 2016 dated 17.06.2016 support its case, the Ld.AO held the assessee to be in default. It was contended that a relationship of principal to agent existed between the assessee and CC Avenues and Zaaki payment services pvt ltd. Consequently, for AY-2015-16 the Ld.AO vide his order dated 19.03.2018 raised a demand u/s 201 and 201(1A) of Rs.19,82,522/-. On identical analogy the Ld.AO raised demand for AY-2016-17 and 2017-18. Aggrieved, the assessee filed appeal before the Ld.CIT(A) who concurred with the findings of the Ld.AO and confirmed the demand raised by the Ld.AO. While doing so, it was, inter-alia, concluded that the two payment gateways were acting on behalf of the assessee and therefore the assessee was liable for tax deduction.
6.0 Per contra the Ld.DR relied upon the order of lower authorities. It was argued that CBDT notification no.47 / 2016 dated 17.06.2017 is not applicable in the case of the assessee. It was, inter-alia, urged that as the twin gateway payments were acting on behalf of appellant, a relationship of principal to agent arose and hence deduction of TDS became mandatory.
7.0 We have heard the rival submissions in the light of material available on records. It is the case of the assessee that the lower authorities have misunderstood the facts of the case while holding the assessee in default. In support of its contentions, the appellant assessee has filed a detailed paper book, inter – alia, comprising agreements with the payment gateways, (PGs), CBDT notifications and Judicial Precedents. The principal argument taken by the assessee is that there is no principal to agent relationship existing between the assessee and the two payment gateways. The Ld.Counsel for the assessee took us through the contractual agreements entered between the assessee and the two payment gateways to allude that a principal to principal relationship is existing between two parties. Thus, for Zaakpay and CC Avenues, reliance was placed on para 27.2 and 17.4 of the agreement placed at page 94 and 65 of the paper book conveying that the assessee and the PGs are independent parties and no relationship of principal to agent subsist between them. Again, through other provisions of the agreement it was argued that there is total absence of control or any supervision between assessee and its PGs and that the latter are in the capacity of an independent contractor. Drawing references to the terms of the contract the Ld.Counsel argued that the PGs are entitled to their own fees and charges, for providing services to the assessee and the same was deducted before remitting amounts due to the assessee. The Ld.Counsel for the assessee defended the indemnity clause appearing in the agreement by stating that it is a standard risk mitigation practice incorporated in all service agreements and cannot be construed to indicate any agency relationship. The Ld.Counsel argued that the original order / requirement from the customer is received by the assessee which subsequently gets transmitted to the PGs for processing. It is not a case where the PGs are directly dealing with any clients / customers of the assessee. The Ld.Counsel invited our attention to the RBI circular issued in March 2020 stipulating that PG companies are outsourcing partners and the ultimate responsibility for transaction always rests upon the main service provider or the e-wallet company. The Ld.Counsel argued that existence of a principal agency relationship is sina qua non for invocation of provisions of section 194H r.w.s. 201 / 201(1A). Reliance was placed upon the decision of Hon’ble Gujarat High Court in its decision in the case of Ahmadabad Stamp Vender Association 257 ITR 202.
8.0 In support of its contentions, the Ld.Counsel placed reliance upon a plethora of judicial pronouncements as supporting its case. It was argued that Hon’ble Apex Court in the case of Bharti Cellular Limited has also held that principal agency relationship is sina qua non for invocation of provisions of section 194H r.w.s. 201 / 201(1A). Thus, reference was invited to para 6 of the order.
“….6. It is settled by a series of judgments of this Court that the expression ‘acting on behalf of another person’postulates the existence of a legal relationship of principal and agent, between the payer and therecipient/payee.5 The law of agency is technical. Whether in law the relationship between the parties is that of principal-agent is answered by applying Section 182 of the Contract Act, 18726. Therefore, the obligation todeduct tax at source in terms of Section 194-H of the Act arises when the legal relationship of principal-agentis established. It is necessary to clarify this position, as in day-to-day life, the expression ‘agency’ is used toinclude a vast number of relationships, which are strictly, not relationships between a principal and agent…”.
Again, the Ld.Counsel drew attention to para 8 and 9 of the impugned order holding as under:-
“….8. Agency is therefore a triangular relationship between the principal, agent and the third party. In order tounderstand this relationship, one has to examine the inter se relationship between the principal and the thirdparty and the agent and the third party. When we examine whether a legal relationship of a principal and agentexists, the following factors/aspects should be taken into consideration:(a) The essential characteristic of an agent is the legal power vested with the agent to alter hisprincipal’s legal relationship with a third party and the principal’s co-relative liability to have hisrelations altered.7(b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is theexercise of a degree of control by the principal over the conduct of the activities of the agent. Thisdegree of control is less than the control exercised by the master on the servant, and is differentfrom the rights and obligations in case of principal to principal and independent contractorrelationship.(c) The task entrusted by the principal to the agent should result in a fiduciary relationship. Thefiduciary relationship is the manifestation of consent by one person to another to act on his or herbehalf and subject to his or her control, and the reciprocal consent by the other to do so.8(d) As the business done by the agent is on the principal’s account, the agent is liable to render accounts thereof to the principal. An agent is entitled to remuneration from the principal for the work he performs for the principal.
9. At this stage, three other relevant aspects/considerations should be noted. First is the difference between’power’ and ‘authority’. The two terms though connected, are not synonymous. Authority refers to a factual position, that is, the terms of contract between the two parties. The power of the agent however, is not, strictly speaking, conferred by the contract or by the principal but by the law of agency. When a person gives authority to another person to do the acts which bring the law of agency into play, then, the law vests power with the agent to affect the principal’s legal relationship with the third parties. The extent and existence of the power with the agent is determined by public policy. The authority, as observed above, refers to the factual situation. The second consideration is that the primary task of an agent is to enter into contracts on behalf of his principal, or to dispose of his principal’s property. The factors mentioned in clauses (b) to (d) in paragraph8 above flow, and are indicia of this primary task. Clauses (b) to (d) of paragraph 8 are useful as tests or standards to examine the true nature or character of the relationship. Lastly, the substance of the relationship between the parties, notwithstanding the nomenclature given by the parties to the relationship, is of primary importance. The true nature of the relationship is examined by reference to the functions, responsibility and obligations of the so-called agent to the principal and to the third parties….”
9.0 The Ld.Counsel argued that Hon’ble Delhi High Court in the case of Make My Trip India Pvt Ltd as at 104 taxmann.com 263 has, relying upon the aforementioned decisions, held that services provided by PGs falls in the realm of fees and not commission. Thus, Hon’ble High Court held as under:-
“….9. The decision in JDS Apparels ( P) Ltd. (supra) holds that in a similar kind of transaction, the amountretained by the bank is a fee charged for having rendered banking services and “cannot be treated as acommission or brokerage paid in course of use of any services by a person acting on behalf of another forbuying or selling of goods.” The ITAT has, in view of this Court rightly, held that the services provided by thepayment gateway is such that the charges collected by it has to be necessarily treated as fees and not as acommission. The payment in fact is made by one principal to another and it is only being facilitated by thepayment gateway by providing a service. The following observation of this Court in JDS Apparels (P) Ltd.(supra) equally applies to the case on hand:
“16. The amount retained by the bank is a fee charged by them for having rendered the banking servicesand cannot be treated as a commission or brokerage paid in course of use of any services by a personacting on behalf of another for buying or selling of goods. The intention of the legislature is to includeand treat commission or brokerage paid when a third person interacts between the seller and the buyer asan agent and thereby renders services in the course of buying and/or selling of goods. This happens whenthere 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 ofgoods. 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 oreven 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 coveredand 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…. “
10.0 In the case of Corporation Bank, Hon’ble Karnataka High Court relying upon JDS apparels held that
“….7. Now we may advert to the facts of the case in hand. In case the credit card issued by the assessee was usedon the swiping machine of another bank, the customer whose credit card was used got access to internetgateway of acquiring bank resulting in realization of the payment. Subsequently, the acquiring bank realizeand recover the payment from the bank, which had issued the credit card. The relationship between theassessee and any other bank is not of an agency but that of two independent basis on principal- principal basis.Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, then also itis pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid toit. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the Highcourt of Delhi in JDS Apparels supra and hold that provisions of section 194H of the Act are not attracted tothe fact situation of the case. In the result, the third substantial question of law is also answered against therevenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails andis hereby dismissed…”
11.0 The Ld.Counsel also drew attention to the decision of Coordinate bench of the Bangalore tribunal in the case of Knowledge Hut Solutions as at 466 / Bang / 2023
“….
22. On merit we have heard the Ld.Counsel appearing for theassessee. According to him, TDS is also not liable deductedon whole receipts. On this aspect, he has relied upon certainjudgments. TDS u/s. 194H has to be made on thecommission part and not on the whole receipts as the crux ofhis arguments. The addition therefore, has been made onlyon estimation basis and thus liable to be deleted.
23. Moreso, the appellant paid Rs. 16,76,041/- andRs.9,76,530/- towards the gateway payment charges to the said M/s. Razor Pay and M/s. Avenue India Pvt. Ltd. and also filed reconciliation statement of commission expenses with books of accounts and the TDS returns filed by the appellant …………………………………………………………………………………………………………………
26. Further the Hon’ble Delhi High Court in case of PCIT vs.Make My Trip India (P.) Ltd. (supra) has observed as follows:
“16. The amount retained by the bank is a fee charged bythem for having rendered the banking services and cannotbe treated as a commission or brokerage paid in course ofuse of any services by a person acting on behalf of anotherfor buying or selling of goods. The intention of thelegislature is to include and treat commission or brokeragepaid when a third person interacts between the seller andthe buyer as an agent and thereby renders services in thecourse of buying and/or selling of goods. This happenswhen there is a middleman or an agent who interacts onbehalf of one of the parties, helps the buyer/seller to meet,or participates in the negotiations or transactions resultingin the contract for buying and selling of goods. Thus, therequirement of an agent and principal relationship. This isthe exact purport and the rationale behind the provision.The bank in question is not concerned with buying orselling of goods or even with the reason and cause as towhy the card was swiped. It is not bothered or concernedwith the quality, price, nature, quantum etc. of the goodsbought/sold. The bank merely provides banking servicesin the form of payment and subsequently collects thepayment. The amount punched in the swiping machine iscredited to the account of the retailer by the acquiringbank, i.e. HDFC in this case, after retaining a small portionof the same as their charges. The banking services cannotbe covered and treated as services rendered by an agentfor the principal during the course of buying or selling ofgoods as the banker does not render any service in the nature of agency.”
27. From the case in hand, we find that the parties are serviceproviders who collect fees from participants and they collectgateway payment commission from the appellant afterreturning the gateway charges they transfer the balanceamount collected from the participants to the appellant.
28. We find that the payments made to gateway providers are not brokerage and TDS u/s. 194H of the Act is not liable to be deducted.
29. Thus taking into consideration the entire aspect of the matter and respectfully relying on the judgment passed by thedifferent forums, we find that in the present facts andcircumstances of the matter, TDS is not liable to be madeu/s. 194H. The addition, is, therefore, deleted….”
10.0 Defending its case of reliance upon the CBDT notification no.47 / 2016 dated 17.06.2016 it was pleaded that as PG charges are similar in nature to a credit or debit card commission such charges get covered by the impugned notification as held by Hon’ble Delhi High Court in the case of Make my trip supra. The Ld.Counsel argued that CBDT notification No.56 / 2012 dated 31.12.2012 also postulates that no TDS is deductible on such payments.
11.0 We find sufficient force in the argument of the assessee regarding the non-existence principal to agency relationship between the assessee and the two PGs. We have also noted that the assessee’s case is covered by the decisions as well as CBDT instruction discussed hereinabove. We are therefore of the considered view that the provisions of section 194H r.w.s. 201 and 201(1A) are not attracted in this case. Accordingly, we set aside the order of the lower authorities and direct the Ld.AO to delete the impugned demand raised u/s 201 and 201(1A) for AY-2015-16. All the grounds of appeal raised by the assessee are therefore allowed.
12.0 In the result the appeal of the assessee vide ITA No.7830/Del/2018 is allowed.
13. As stated above, the facts in assessee’s appeal vide ITA No.7830/Del/2018 for AY-2015-16 are reported to be identical to those in ITA Nos.273 & 274 / Del / 2025 supra. No distinguishment of facts was pointed out by the Revenue. Consequently the decision taken in ITA No.7830/Del/2018 for AY-2015-16 shall apply mutatis mutandis in ITA Nos.273 & 274 / Del / 2025 also. Accordingly, in the impugned appeals also, we set aside the order of the lower authorities and direct the Ld.AO to delete the impugned demand raised u/s 201 and 201(1A) for AY-2016-17 & 2017-18 All the grounds of appeal raised by the assessee are therefore allowed.
14.0 In the result the appeal of the assessee vide ITA No.273 & 274/Del/2025 are also allowed.
Order pronounced in open court on 26.09.2025.
