TDS not deductible on sum paid to banks for utilization of credit card facilities

Commission paid to the credit card companies cannot be considered as falling with in the purview of S.194H. Even though the definition of the term “commission or brokerage” used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person.

In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, concluding that there was no requirement for making TDS on the ‘Commission retained by the credit card companies.

INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI

BEFORE SHRI B.R. MITTAL, JM AND SHRI RAJENDRA, AM

I.T.A. No. 7439, 7440 and 7441/Mum/2010

Assessment Years: 2009-10,2007-08 and 2008-09

Income Tax Officer-(TDS)-2(1)

Vs.

M/s Jet Airways (India) Ltd.

Date of Pronouncement : 17.7.2013

O R D E R

PER B.R.MITTAL JM:

These three appeals are filed by the department against three separate orders of ld. CIT(A) of dated 27.8.2010 for the assessment years 2007-08 to 2009-10 on similar grounds and similar facts, except that the amount involved varies. Therefore, we have heard these appeals together and dispose of the same by a common order for the sake of convenience.

2. All these three appeals are arising out of the orders passed by the AO u/s 201(1)/201(1A) of the Income Tax Act, 1961 (the Act) of dated 18.11.2009. Since the grounds of appeal and the facts are common, we consider it prudent to state the grounds of appeal which are as under :

“1 On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in holding that no TDS was deductible u/s 194H by the assessee company on the amount held by the banks/credit card agencies as   service charges in respect of credit card ticket bookings and by further holding that the banks/credit card agencies are not agents of the assessee and thereby clearly ignoring the fact that in the entire process of facilitation of credit card ticket bookings, the bank is nothing but a constructive agent for the airline companies and nothing else.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in failing to appreciate the real and true nature of the relationship between the airline company and bank/credit card agencies.

3. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in failing to appreciate that in substance and in fact relationship between the airline company and bank/credit card agencies was in nature of principle and agents relationship and therefore, the Ld. CIT(A) erred in not upholding the A.O’s conclusion of bringing the charges paid by the airline company to the banks/credit card agencies within the purview of section 194H of the I.T Act, 1961.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the lower withholding of tax u/s 195(3) be applied to their retrospective operation.

5. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in ignoring well established principle that unless stated otherwise, any certificate or permission or approval as the case may be, is deemed to take effect from the date of issue or the date of its operation if specified and cannot take a retrospective effect, unless the same is clearly expressed to do so by the competent authority.

6. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary at the time of hearing of the case or thereafter.”

3. In Ground Nos. 1 to 3 of the appeals, the issue involve is as to whether Ld.CIT(A) has erred on the facts and circumstances of the case, in holding that no TDS u/s 194H of the Act is required to be deducted by the assessee-company on the impugned retention by banks/credit card agencies in respect of ticket booked through credit card.

4. The relevant facts are that the assessee is a company engaged in the business of aviation i.e. transportation of passengers and cargo by air. A survey action u/s 133A of the Act was carried out on 5.01.2009. After survey, proceedings were initialed u/s 201(1)/201(1A) of the Act in connection with the applicability of TDS on amounts retained by the banks in respect of air tickets booked through credit cards. 5. The AO has stated break up of the amounts retained by the various banks from the air tickets sold through the credit cards in respect of Financial Years relevant to the assessment years under consideration as under:

On behalf of the assessee it was stated during the course of proceedings that provisions of section 194H of the Act are not applicable on the above mentioned amounts retained by the banks as the amounts retained by the banks is in the nature of discounting in consideration of immediate payment made by the banks to the assessee. That such charges partakes the character of discounts which are not subject to tax deduction at source under the prevailing provisions of the Act. That in case of discounting charges retained by the banks there would be no case where one person would be acting on behalf of another, since the sale is concluded by the assessee on his own behalf and not by the banks on behalf of the assessee.

6. However, the AO did not accept the submissions of the assessee. The AO has stated that as per the agreement between the banks and the assessee, the banks suppose to provide the assessee the facility of their credit card internet payment gateway to enable the assessee to collect the payment made by the customer to it for orders placed through such facility by the such customer i.e the person holding credit card. That as per the agreement, there is no talk of any discount to be given by the assessee to the banks and such payments are the transactions charges. Therefore, such a payments made for use of the credit card, internet payment gateway to enable the assessee to collect the payments made by the customers to it for orders placed through facility by the said customers is squarely covered by the definition of “commission or brokerage” given in Explanation (i) below the third proviso to section 194H of the Act. Therefore, the AO has considered the following amounts subject to section 194H of the Act in the assessment years 2007-08 to 2009-10; and computed the default u/s 201(1) of the Act as under ~

 In view of the above, the AO directed to pay above amounts u/s 201(1) and interest levied u/s 201(1A) of the Act for the assessment years under consideration. Being aggrieved, the assessee filed appeals before the First Appellate Authority.

7. On behalf of the assessee it was contended that the provisions of section 194H are applicable only in those cases where an element of agency is in existence. That since there was no element of agency between the assessee and the banks who are making the payment of tickets purchased by the bank’s clients, are being made by the banks during the normal course of bank’s business. That there is nothing on record to prove that an element of agency exists between the banks and the airlines. That the transactions between the banks and the assessee are based on principal to principal. It was contended that though an agreement exists between the assessee and banks, as discussed by the AO in the orders passed u/s 201(1)/201(1A) of the Act, but that agreement is only related to the services and facilities being offered by the banks for facilitating early payments to the assessee. Since there is no existence of agency between the banks and the assessee, it was contended that the provisions of section 194H cannot be applied. The assessee also filed detailed written submissions before the ld CIT(A), which has been reproduced by the ld. CIT(A) in the impugned order (at pages 5 to 11 of the order for AY-2007-08). The ld. CIT(A) after considering the submissions of the assessee has held that the action of the AO in invoking the provisions of section 194H of the Act cannot be upheld. He has stated that since the customers buy the tickets through credit card it became obligatory on the part of the banks whose credit card is being held by the customers to make the payment of the value of the ticket to the airlines immediately. That this payment is on behalf of the bank’s customers holding credit card. While making the payment to the airlines the bank deducts a small percentage from the value of the tickets and retains the same as its service/discount charges etc. The ld. CIT(A) has stated that the bank in the normal discharge of its functions is making payments of the value of the tickets to the airline on behalf of its clients who are holding cards. While remitting the amount to the assessee, the bank deducts a small percentage out of it which can be said a service charge or discount or by any other name. The ld. CIT(A) has stated that the provisions of section 194H will not be applicable to the transactions between principal to principal. Section 194H can be attracted only in those cases where there is an existence of agency between the two parties. He has stated that an extract of the agreement stated by the AO in the orders passed u/s 201(1)/201(1A) of the Act do not lead to a conclusion that there is    an existence of agency between the bank and the airline. The bank is merely granting use of the facility of its credit card internet gateway to the assessee to enable it to receive payments for services sold by it to the customer who are credit card holders. He has stated that termination clause in the agreement between the bank and the airline does not give rise to the agency. It is merely clause whereby the bank has safeguarded its interest only. The ld. CIT(A) after considering the decisions relied upon by the assessee in the case of Mother Dairy India Ltd V/s ITO (2009) 28 SOT 42 (Delhi-Trib) and the decision of Pune Bench of the Tribunal in the case of Government Milk Scheme V/s ACIT, 281 ITR 88(ITAT) has held that the conclusion of the AO is based on the agreement between the bank and airline that alleged commission retained by the banks out of value of the tickets is covered by the provisions of section 194H of the Act is not correct. The bank is merely making the payment to the airline on behalf of the customers who are holding credit cards. The bank is in no way helping the assessee to sell the tickets and the banks’ responsibility is only to the extent of paying to the assessee the value of the tickets which have been purchased by its clients through credit cards, which is normal function of the bank. In view of the above the department is in appeals before the Tribunal.

8. At the time of hearing, the ld. DR submitted that the amount retained by the bank out of the air tickets booked through the credit cards is covered by the Explanation (i) to section 194H of the Act as the said amount is a payment in respect of service charge. The ld. DR referred the decision of the Hon’ble Kerala High Court in the case of Vodafone Essar Cellular Ltd. V/s ACIT (2010) 194 TAXMAN 518 (KER.). However, the ld. AR supported the order of the ld. CIT(A) and submitted that the issue is covered squarely in favor of the assessee by the decision of the Jaipur Bench of the Tribunal, in the case of M/s. Gems Paradise V/s ACIT in ITA No. 746/JP/2011 (AY-2008-09) dated 2.2.2012 and followed by the same Bench of the Jaipur Tribunal in Shri Bhandari Jewelers Vs. The ACIT in ITA NO. 745/JP/2011(AY- 2008-09) dated 02.02.2012. The ld. AR further submitted that the similar issue was also considered by Bangalore Bench of the Tribunal in the case of Tata Teleservices Ltd V/s DCIT (2013)140 ITD 451(Bangalore) which has been decided by following the decision of Hyderabad Bench of the Tribunal in the case of DCIT V/s M/s Vah Magna Retail (P) Ltd in ITA No.905/Hyd/2011(AY-2007-08) dated 10.4.2012. The ld. AR filed the copies of the aforesaid orders to substantiate his above submissions. He further submitted that the reliance placed by the ld. DR on the decision of the Hon’ble Kerala High Court in the case of Vodafone Essar Cellular Ltd (supra) is not applicable to the facts of the case of    the assessee as in that case, the assessee was carrying on the business of rendering a mobile telephone services to the customers through appointment of the distributors in the State. Under the Telecom Regulations, connection can be given only to customers producing identity, proof of address, etc. There was a distribution agreement, and under a distribution agreement, the distributor got customers for the assessee and all work in relation to collection of documents of identity of the customers, delivery of sim cards for giving connection to the customers, collection of charges, etc., was done by the distributor. That the assessee paid service charges to the distributor for the services rendered in regard to that service called ‘post-paid services’. In that context the Hon’ble High Court held that the discount was given by the assessee, a Mobile cellular operator, to distributor for the services to be rendered by the distributor to the assessee and, so much so, it fall within the definition of commission or brokerage under the Explanation (i) to section 194H of the Act. The ld. AR submitted that in assessee’s case there was no element of agency existing between the bank and the airline and the transactions between the banks and the assessee was based on principal to principal Hence the above case of Hon’ble Kerala High Court (supra) does not apply to the facts of the case of the assessee. On the contrary, he submitted that the issue is covered in favour of the assessee by the earlier decisions of the various Benches of the Tribunal.

9. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of the authorities below. We have also carefully considered the provisions of section 194H of the Act. We observe that the similar issue has been considered by the Jaipur Bench of the Tribunal in the case of M/s. Gems Paradise (supra) and the Tribunal held vide paragraph 27 of the said order that the provisions of section 194H of the Act are not applicable as the banks make payments to the assessee after deducting certain fees as per the terms and conditions in the credit card and it is not a commission but a fee deducted by the banks. The said paragraph 27 of the order is reproduced below:

” 27. After considering the orders of the AO and ld. CIT (A), we find that assessee deserves to succeed in this regard. Section 194H is applicable where any commission has been paid by the Principal to the commission agent. This is not a case of commission agent as assessee sold its goods through credit card and on presentation of bill issued against credit card, the bank makes payment to the assessee after deducting agreed fees as per terms and conditions in case of credit card. This is not a commission payment but a fees deducted by the bank. If there is an agreement, that is agreement between the credit cardholder and the bank. Bank is a Principal and to spread over its business, a scheme is floated by bank i.e. issuance of credit cards. Bank issues credit card to the various customers who purchase the various credit cards on the agreed terms    and conditions. One of the major condition is that if credit card holder does not make payment within the prescribed time limit then they charge 2% penal amount of bill which is raised by the shop keeper against sale of its items through credit card. Bank cannot refuse the payment to the shop keeper who sale their goods through credit card. Only in those cases where goods are found damaged and credit card holder inform the bank that the material purchased by them is damaged or defective and request the bank not to make the payment, in such cases only bank can withhold the payment, otherwise the bank has to make the payment to the shop keeper. Therefore, in our considered view, there is no such relation between the bank and the shop keeper which establishes the relationship of a Principal and Commission Agent. Technically it may be written that bank will charge certain percentage of commission but this is not a commission because assessee sells its goods against credit cards, and on presentation of bills, the bank has to make the payment. It is not the case that bank has advised the assessee to sell their goods to its customers then he will pay the commission. It is reversed in a situation as bank issued credit cards to the credit card holders on certain fees or whatever the case may be and the card holder purchases material from the market through his credit card without making any payment and that shop keeper presents the bill to the bank against whose credit card the goods were sold and on presentation of bill as stated above the bank makes the payment. Therefore, in our considered view, provisions of section 194H are not attracted in this type of transaction. Therefore, we hold that addition made and confirmed by ld.CIT (A) was not justified. Accordingly, the addition made and confirmed by ld. CIT (A) is deleted.”

10. We observe that the said issue was again considered by the Jaipur Bench of the Tribunal in the case of Bhandari Jwellers (supra) and following the above decision of the Tribunal, the Tribunal vide paragraph 7 of the said order again held that the provisions of section 194H of the Act are not attracted in this type of transactions. It was held that no TDS is required to be deducted on the fees charged by the bank on credit card transactions. We also observe that the similar issue again come up before the Hyderabad Bench of the Tribunal in the case of M/s Vah Magna Retail (P) Ltd (supra) and the Tribunal vide paragraph 4 of the said order dismissed the appeal of the department by holding that the amount retained by the principal contractor from the payments made to the contracting persons and there was no requirement for making TDS on the amount. The said paragraph 4 of the order reads as under:

“4. We heard the Learned Departmental Representative and perused the orders of the lower authorities and other material on record. Assessee is a company engaged in the business of direct retail trading in consumer goods. Assessee claimed deduction of Rs.16,34,000 on account of commission paid to the credit card companies, which has been disallowed by the assessing officer in terms of S.40(a)(ia) on account of the failure of the assessee to deduct tax at source in terms of S.194H of the Act, while making the said commission payments. It was the contention of the assessee before the lower authorities that the assessee only receives the payment form the bank/credit card companies concerned, after deduction of commission thereon, and thus, this is only in the nature of a post facto accounting and does not involve any payment    or crediting of the account of the banks or any other account before such payment by the assessee. Considering these submission of the assessee, the CIT(A) accepted the claim of the assessee for deduction of the amount of Rs. 16,34,000 on the following reasoning :-

“9.8 On going through the nature of transactions, I find considerable merit in the contention of the appellant that commission paid to the credit card companies cannot be considered as falling with in the purview of S.194H. Even though the definition of the term “commission or brokerage” used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, concluding that there was no requirement for making TDS on the ‘Commission retained by the credit card companies, the dis allowance of Rs. 16,34,000 is deleted…..”

We find no infirmity in the above reasoning given by the CIT(A). We accordingly uphold the order of the CIT(A) and reject the grounds of the Revenue which are devoid of merit.”

We also observe that the Bangalore Bench of the Tribunal by following the said decision of the Hyderabad Bench of the Tribunal has held that the payments made to the banks on account of utilization of credit card facilities would be in the nature of bank charges and not in the nature of commission within the meaning of section 194H of the Act and hence no TDS is required to be deducted u/s 194 H of the Act. In view of the above we hold that the issue is squarely covered in favour of the assessee. Respectfully following the decisions of the Co-ordinate Benches of the Tribunal we uphold the order of the ld. CIT(A) and reject the grounds No.1 to 3 taken by the department for all the three assessment years under consideration.

11. In ground Nos.4 and 5 of all the three appeals, the issue is the date from which the certificates issued u/s 194(3) of the Act by the AO is to take effect.

12. The relevant facts are that in respect of two banks viz. American Express Bank Ltd and Citibank N.A. the certificate u/s 195(3) of the Act was obtained from the AO for receiving the payments without deduction of tax at source. The AO stated that the said certificates are valid from the date of issuance of certificates irrespective of the fact that in the certificates though the specified period is mentioned as Financial Year. The ld. CIT(A) has held that the AO is not justified to apply the certificates from the date of issuance and bring the amount retained by the said banks to tax for the concern month by applying the provisions of section 194H of the Act. Hence the department is in appeal for all the three assessment years on this issue before the Tribunal.

13. During the course of hearing the ld. DR relied on the orders of the AO and stated that the said certificates issued u/s 195(3) of the Act are applicable from the date of issuance of the certificates and not from the first day of concerned Financial Year.

14. On the other hand, the ld. AR supported the orders of the ld.CIT(A) and further submitted that Rule 29B (5) of the Income Tax Rules, 1962 also provides that the certificates issued u/s 195(3) authorizing to receive the payments without deduction of tax shall be valid for the Financial Year specified therein, unless it is cancelled by the AO at any time before the expiry of the said Financial Year. He submitted that the order of the ld. CIT(A) on this issue is in accordance with law and the same should be confirmed.

15. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of the authorities below as well as Rule 29B(5) of the Rules. We also observe that the assessee has also filed a copy of certificates issued by the AO u/s 195(3) of the Act dated 27.4.2006, 30.3.2007, 31.3.2008 and 31.3.2008 which are addressed to Citibank N.A. for Financial Years 2006-07 to 2008-09 respectively. On perusal of the said certificates it is specifically mentioned that the said bank is authorized to receive the payments, interests without deduction of income tax u/s 195(1) of the Act in the respective Financial Years. Similarly, the assessee has also placed on record the copy of certificates dated 27.4.2006 and 28.4.2007 which are addressed to American Express Bank Ltd authorizing the said bank to receive interalia any sum without deduction of income tax under sub-section (1) of Section 195 of the Act for Financial Years 2006-07 and 2007-08 respectively. Similarly, Ld.AR has filed a copy of certificate of the AO dated 30.4.2008 addressed to American Express Banking Corporation relating to Financial Year 2008-09 to receive interest and other sums without deduction of tax at source in the said Financial Year. Therefore, we agree with the orders of the ld. CIT(A) that the said certificates issued u/s 195(3) of the Act are applicable for the concerned Financial Years and will not be effected only from the date of issuance as stated by the AO. Hence, we uphold the orders of the ld.CIT(A)for all the  three assessment years under consideration on this issue by rejecting the Grounds No.4 and 5 of appeals taken by the department.

16. In the result, all the three appeals filed by the department for the assessment years 2007-08 to 2009-10 are dismissed.

Order pronounced after hearing ld. Representative of the parties in the open court on 17th July, 2013