Commissioner of Income Tax-II vs. JDS Apparels Private Limited: Applicability of Section 194H on Credit Card Commission

Facts of the Case

The respondent-assessee, JDS Apparels Private Limited, is engaged in the business of trading readymade garments. During the assessment year 2009-10, the assessee utilized card swiping machines provided by HDFC Bank to accept payments from customers. When a customer made a purchase via credit card, HDFC Bank (the acquiring bank) would pay the bill amount to the assessee after deducting a processing fee or charge.

The Assessing Officer (AO), acting on information from the TDS Circle, Mumbai, claimed that these charges were in the nature of "commission" paid to the bank. Consequently, the AO held that the assessee should have deducted Tax at Source (TDS) at the rate of 10% under Section 194H of the Income Tax Act. Due to non-deduction, the AO disallowed the expenditure of Rs. 44,65,654/- under Section 40(a)(ia).

Issues Involved

• Whether the charges deducted by an acquiring bank (HDFC) from payments made through credit cards constitute "commission" under Section 194H of the Income Tax Act.
• Whether the relationship between a retail merchant and an acquiring bank is that of a Principal and Agent, which is a prerequisite for the application of Section 194H.
• Whether the disallowance under Section 40(a)(ia) was justified for failure to deduct TDS on bank processing charges.

Petitioner’s Arguments (Revenue)

• The Revenue contended that the bank provides a service to the merchant for selling goods, and the fee retained by the bank is a payment for these services.
• They argued that the transaction falls within the definition of "commission or brokerage" as per Explanation (i) to Section 194H, which includes payments for services rendered in the course of buying or selling goods.
• The Commissioner of Income Tax (Appeals) initially supported this by likening the transaction to bill discounting, where the bank takes the risk of recovery and charges a fee for the same.

Respondent’s Arguments (Assessee)

• The assessee argued that there is no agency relationship between the merchant and the bank.
• The bank does not act on behalf of the merchant to sell goods; rather, the bank provides a technical and financial facility for electronic payment.
• The charges deducted are more akin to a discount or a service fee rather than a commission, as the bank is not an agent of the assessee.

Court Order / Findings

The High Court of Delhi, while dismissing the Revenue's appeal, held:

• Absence of Agency: Section 194H specifically applies to payments made to a person "acting on behalf of another person". The court found that the bank was not acting as an agent of the merchant for the sale of garments.
• Distinction Between Commission and Discount: Referring to various precedents, the court noted that "commission" involves a fiduciary duty and an agency element. The bank's charges are for providing a technical platform and facilitating a debt-free transaction for the merchant.
• Exhaustive Definition: The court clarified that the word "includes" in Explanation (i) to Section 194H must be read in a way that requires the element of agency to be present in all three scenarios listed in the section.
• Precedents: The court relied on the Supreme Court's ruling in Ahmedabad Stamp Vendors Association, which held that transactions of sale (or discounts therein) do not attract Section 194H because of the lack of agency.

Important Clarification

The court clarified that for Section 194H to be triggered, the recipient of the income must be acting on behalf of the payer. Bank charges for credit card swiping are not "commission" because the bank is not selling the goods on behalf of the merchant; it is merely facilitating the payment process.

Sections Involved

• Section 194H: TDS on Commission or Brokerage.
• Section 40(a)(ia): Disallowance of expenditure for non-deduction of TDS.
• Section 260A: Appeal to the High Court.

Link to download the order -

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