2016 (10) TMI 804 - AT - Income Tax

TDS u/s 194H - Commission - whether the charges deducted by the bank for use of swiping machines for sales through credit card is commission or not - Held that - 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. Decision in the case of ITO TDS Vs. Jet Air Ways (India) Ltd. 2013 (8) TMI 586 - ITAT MUMBAI followed - Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the charges deducted by the bank for the use of swiping machines for sales through credit cards constitute commission.
2. Whether such charges fall under the provisions of Section 194H of the Income Tax Act, 1961, necessitating the deduction of TDS.

Issue-wise Detailed Analysis:

1. Nature of Charges Deducted by the Bank:
The core issue in these appeals is whether the charges deducted by the bank for the use of swiping machines for sales through credit cards can be classified as commission. The Assessing Officer (AO) contended that these charges are in the nature of commission, thereby requiring the deduction of TDS under Section 194H of the Income Tax Act, 1961. The AO argued that the bank acts as an agent of the Retail Merchant (the assessee) by facilitating the recovery of bill amounts and charging a discount/commission for this service.

However, the CIT (A) and the Tribunal disagreed with this view. The Tribunal noted that the bank charges for credit card transactions are fees imposed by the bank for facilitating payments, operating on a principal-to-principal basis. The bank deducts these charges before remitting the remaining amount to the merchant, and this does not constitute a commission. The Tribunal emphasized that there is no agency relationship between the bank and the merchant, as the bank merely facilitates the payment process without acting on behalf of the merchant.

2. Applicability of Section 194H:
Section 194H of the Income Tax Act, 1961, pertains to the deduction of TDS on commission or brokerage payments. The AO's stance was that the charges deducted by the bank should be subjected to TDS under this section. However, the Tribunal found that the provisions of Section 194H are applicable only where an element of agency is present. Since the bank is not acting as an agent for the merchant but rather as an independent entity facilitating payments, the charges deducted cannot be classified as commission under Section 194H.

The Tribunal also referred to several precedents, including the case of ITO Vs. Jet Airways (India) Ltd., where it was held that bank charges for credit card transactions are not in the nature of commission but are fees for services rendered on a principal-to-principal basis. The Tribunal reiterated that the relationship between the bank and the merchant does not involve any agency, and thus, the provisions of Section 194H do not apply.

Judgment:
The Tribunal upheld the CIT (A)'s order, confirming that the charges deducted by the bank for credit card transactions are not commission and do not fall under the provisions of Section 194H. Consequently, there is no requirement for the assessee to deduct TDS on these charges. The appeals by the Revenue were dismissed, and the Tribunal's decision was pronounced in the open court on 01-09-2016.

Conclusion:
The Tribunal's judgment clarified that the charges deducted by banks for facilitating credit card transactions are not commission and do not necessitate the deduction of TDS under Section 194H of the Income Tax Act, 1961. This decision was based on the understanding that the relationship between the bank and the merchant is not one of agency but rather a principal-to-principal relationship.