ITO (TDS) 3(4), MUMBAI vs. THE MOBILE STORE LTD, MUMBAI

The only common issue in these two appeals of the Revenue is against the order of the CIT (A) deleting the charging of TDS and consequential interest u/s 201(1) and 201 (1A) of the Act for holding the assessee in default for noon-deduction of TDS u/s 194H of the Act by the AO on the amount held by the bank / credit card agencies as service charges in respect of credit card services. The Revenue has raised identically worded grounds in both the years and hence we are reproducing the grounds as raised in financial year 2009-10 as under:- “i) On the facts and circumstances of the case and in law, the CIT (A) 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 services provided and by further holding that the bank/credit card agencies are not agencies of the assessee and thereby clearly ignoring the fact that in the entire 2 & 794/Mum/2013 process of facilitation of credit card, the bank is nothing but a construction agent for the assessee company and nothing else. ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in failing to appreciate the real and true nature of the relationship between the assessee company and bank/credit card agencies. iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in failing to appreciate that in substance and in fact relationship between the assessee company and bank/credit card agencies was in the nature of principal and agents relationship and therefore, the Ld. CIT(A) erred in not upholding the AO’s conclusion of bringing the charges to the assessee company by the bank/credit card agencies within the purview of section 194H of the I. T. Act, 1961”.

Briefly stated facts are that the assessee is a Retail Merchant engaged in the mobile handset trading. A TDS survey u/s 133 of the Act was conducted in the case of HDFC Bank Ltd. During the course of survey on HDFC Bank Ltd., it was revealed that the assessee is carrying out the activities through different players involved in credit card transactions and activities of credit card transactions are as under:- “i. Credit card holder (customer), ii. Credit card issuing bank iii. Credit card acquiring Bank (HDFC Bank) iv. Retail merchant (Assessee company) v. Bill settling agency (BSA) According to the Assessing Officer, as an issuing bank, HDFC Bank Ltd. issues credit cards to customers. Acquiring Bank provides swiping machines to retail merchants. Bill settling agency which is VISA/Master Card, in this case facilitates transfer of bill amount. According to the AO, the Retail Merchant swipes credit cards for receiving payment from the customers and forwards the bills to the Acquiring Bank for making payment to the Retail Merchant and the Acquiring Bank withholds its discount/commission against the services provided to the Retail Merchant. The Acquiring Bank recovers the bill amount from the Issuing Bank through BSA and thus, the Acquiring Bank facilitates recovery of bill amount for Retail Merchant by charging discount in the nature of commission and hence, it acts as agent of the Retail Merchant. On this basis, the AO held that the discount in the nature of commission withheld by the Acquiring Bank against making payment to the Retail Merchant be subjected to TDS as per provisions of Chapter XVII-B @10% u/s 194H 3 & 794/Mum/2013 of the Act. Accordingly, the AO noted that the acquiring bank is withholding amounts as transaction charges i.e. credit card collection charges while making payment of the bill amount on sales carried through the assessee Company i.e. Retail Merchant. According to the AO, the assessee has not deducted TDS as the payment of transaction charges are subjected to TDS u/s 194H of the Act. Accordingly, the AO treated the assessee in default and the assessee was held as “assessee in default” to the extent of payment made on account of transaction charges for credit card collection charges of Rs.6,90,97,097/-.Therefore, he charged TDS u/s 201(1) at Rs.71,17,000/- and also charged consequential interest u/s 201(1A) of the Act for 36 months at Rs.25,62,120/-. Therefore, he created the demand of Rs.96,79,121/-. Aggrieved, the assessee preferred appeal before the CIT (A) who relying on the decision of Mumbai Tribunal in the case of ITO Vs Jet Air Ways India Ltd. in ITA No.7439 to 7441/Mum/2010 dated 17-07-2013 allowed the claim of the assessee by observing in Para 3.2 and 3.3 of his appellate Order as under:- “3.2 I have gone through the details and facts in the case. It is not disputed that appellant is retail merchant, doing business of trading of mobile handsets for which has received payments through the credit card of its customers and for collecting the credit sale amount for appellant, the bank has been paid bank charges. The question involved is whether the bank charges paid to HDFC by the appellant were liable for TDS, or not. I find that issue is squarely covered in favour of appellant by the decision given in the case of DCIT Vs. M/s. Vah Magna Retail (P) Ltd., Hyderabad in 905/HYD/2011 and also in the case of ITO vs. Jet Airways (India) Ltd. in ITA Nos. given by their order dated 17.07.2013 by Hon’ble Mumbai Tribunal in 7439, 7440 and 7441/MUM/2010 and again in ITA No.5264/MUM/2012 in order dated 23.10.2013. On similar line it was decided in favour of appellant in the case of Gems Paradise Vs. ACIT in ITA No.746/JP/2011 vide order of Jaipur ITAT dated 02.02.2012 also. 3.3 Following the decisions available on the issue that the bank charges being not liable for TDS consequent charging of interest u/s 2301(1) and 201(1A) does not arise in the case, the amount charged for TDS and interest levied for an amount of Rs.96,79,121/- for AY 2010- 2011 and Rs.1,18,45,512/- for AY 2011-12 are deleted.” Aggrieved, now the Revenue is in appeal before the Tribunal in both the years.

We have heard the rival contentions and gone through the facts and circumstances of the case. The facts of the case are admitted and there is no dispute about it. None of the parties i.e. Revenue or the assessee has disputed the 4 & 794/Mum/2013 facts of the case. The only issue remains before us is whether the charges deducted by the bank for use of swiping machines for sales through credit card is commission or not and consequentially the same falls under the provisions of Section 194H of the Act for deduction of TDS. We find from the facts of the case that the transaction charges were withheld by HDFC Bank Ltd., Axis Bank and Punjab National Bank for the assessment year towards credit card collection charges which are in the nature of bank charges from the payments made by them for sale to customers. Thus, we understood that the bank pays the net amount of collection after deducting the bank charges. It is a fact that bank is a financial institution and financial intermediary, who accepts deposits and channel those deposits into lending and other business activities. Over and above this, bank also conducts various banking operations in its ordinary course of business activities i. e. bank guarantee, credit card collection, overdraft facilities etc. towards which the bank imposes charges/fee on principal to principal basis. Before us, in the instant case, the bank charged fee in respect of credit card collection charges on principal to principal basis. According to us, credit card charges are nothing but charges charged on principal to principal basis for the reason that bank accepts the commitment of making all credit card payments after deducting its own charges, which are related to this commitment and does not fall u/s 194H of the Act in term of “commission”. We are of the view that the provisions of section 194H of the Act are applicable in those cases where element of agency is present. But, in the present case, there is no such element of agency between the assessee and the bank. The above payments represent the charges paid to the bank for facilitating the payments by the customers. This is the modern and easiest way of doing business, which has been internationally accepted all over the world. Since there is no existence of agency, we are of the view that the provisions of section 194H of the Act cannot be applied to the assessee.

Further, from the above discussion, an inference can be drawn that the commission and brokerage is required to be paid directly or indirectly to a person acting on behalf of another person for services rendered or for any service in the course of buying and selling of goods or in relation to any transaction relating to 5 & 794/Mum/2013 any asset, valuable article or things, not being securities. A close look at the provision of section 194H of the Act would clearly indicate that commission or brokerage is required to be paid directly or indirectly to a person who is rendering services in the course of buying or selling of goods or any other assets or valuables. In the present case before us, mobile or allied items are being sold by the assessee to the purchasers at full cost and instead of receiving payments from the buyers towards the bill raised on him; the assessee receives payments from the bank i.e. the intermediary. The bank pays to the assessee as soon as sales take place but the system does not give rise to any agency between the assessee and banks for the reason that the banks are not helping in sale of items or not even acting on behalf of the assessee. It merely acts as a mechanism to facilitate payment to the assessee, which has developed with the paces of time due to development of business and frequency of purchases by the customers. Accordingly, in our view the amount retained by the banks cannot be termed as commission so as to attract the provision of section 194H of the Act.

The reliance placed by the learned Counsel for the assessee in the case of ITO – TDS Vs. Jet Air Ways (India) Ltd. [2014] 147 ITD 133 (Mumbai Tribunal) wherein similar issue was decided as under:- 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 TAXPUNDIT.ORG 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 6 & 794/Mum/2013 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."

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 n terms of S.40(a)(ia) on account of the failure 7 & 794/Mum/2013 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 within 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 TAXPUNDIT.ORG 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 disallowance 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”. In view of the facts and circumstances of this case, we are of the view that credit 7. card charges are nothing but charges charged on principal to principal basis for the reason that bank accepts the commitment of making all credit card payments 8 & 794/Mum/2013 after deducting its own charges, which are related to this commitment and does not fall u/s 194H of the Act in term of “commission”. Accordingly, we are of the view that the provisions of section 194H of the Act are applicable in those cases where element of agency is present, which is absent in the present case and in our view the amount retained by the banks cannot be termed as commission so as to attract the provision of section 194H of the Act. Hence, we confirm the orders of the CIT (A) and dismiss these two appeals of the Revenue.