Recently, in Nov 2014, The Delhi High Court in JDS Apparels Private Limited vs CIT (Income Tax Appeal 608/2014) has ruled that amount deducted by bank for facilitating collection of sales made through credit cards via swipe machines is not in the nature of commission and hence not liable to deduction of tax at source u/ 194H.

The Facts of the Case:
The company JDS Apparels Private Limited was engaged in the business of trading in readymade garments and filed a return of income for the Assessment Year 2009-10 declaring income of Rs.49169380/- . The case was selected for scrutiny under Section 143(3) of Income Tax Act, 1961.  During the assessment proceedings, it was become known that for facilitating the receipt of garment sales made through credit cards, HDFC bank had provided Swipe Machines to the assessee. The assessee had paid commission amount to Rs. 4465654/- to HDFC bank for payments received from the customers who had made purchases through credit cards. The payments for sales through credit card was made to the assessee by HDFC bank after withholding or deducting its fees.

The Assessing Officer considered such payments to HDFC bank as ‘commission” liable to deduction of tax at source under secion 194H @ 10% and accordingly disallowed the this expenditure under section 40(a)(ia). The Commissioner of Income Tax (Appeals) also affirmed the order of the Assessing Officer.

However, the appellate Tribunal held in favour of the assessee by holding that section 194H is not applicable to the case and the Assessing Officer was wrong in invoking Section 40(a)(ia) of the Act and accordingly had erred in making addition of Rs.44,65,654/-, i.e. the charges deducted by HDFC Bank.

The Delhi High Court while disposing off the appeal by the Income Tax Department, concurred with the decision of the Tribunal and ruled out the applicability of Section 194H to the case.

The Delhi High Court referred to distinction between “commission” and “discount” as was drawn by High Court of Gujarat in Ahmedabad Stamp Vendors Association versus Union of India [2002] 257 ITR 202 related to persons carrying on the business of stamp vendors who purchase stamps from the government treasury and sell them to the public. The Court also referred to the judgment of Bombay High in Harihar Cotton Processing Factory versus CIT, (1960) 391 ITR 594 (Bom.) where it was emphasised that “commission” is an allowance for service or labour in discharging certain duties of agency whereas “Rebate” or “discount”, is a remission or payment back and of the nature of a deduction from the gross amount.

The Gujarat High Court held that there should be an element of agency in all the three situations as envisaged in clause (i) of the Explanation to Section 194H of the Act. [ Explanation to Section 194H Click Here >> ] Later, on appeal, the Supreme Court also observed that stamp vendors had purchased stamps in bulk and had received a cash discount and the transaction was of sale and Section 194H of the Act had no application.

The excerpts of the decision of Delhi High Court are as under:

“Applying the above cited case law to the factual matrix of the present case, we feel that Section 194H of the Act would not be attracted. HDFC was not acting as an agent of the respondent-assessee. Once the payment was made by HDFC, it was received and credited to the account of the respondent-assessee. In the process, a small fee was deducted by the acquiring bank, i.e. the bank whose swiping machine was used. On swiping the credit card on the swiping machine, the customer whose credit card was used, got access to the internet gateway of the acquiring bank resulting in the realisation of payment. Subsequently, the acquiring bank realised and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalf” of the respondent-assessee. The relationship between HDFC and the respondent-assessee was not of an agency but that of two independent parties on principal to principal basis. HDFC was also acting and equally protecting the interest of the customer whose credit card was used in the swiping machines. It is noticeable that the bank in question or their employees were not present at the spot and were not associated with buying or selling of goods as such. Upon swiping the card, the bank made payment of the bill amount to the respondent-assessee. Thus, the respondent assessee received the sale consideration. In turn, the bank in question had to collect the amount from the bankers of the credit card holder. The Bank had taken the risk and also remained out of pocket for sometime as there would be a time gap between the date of payment and recovery of the amount paid.”

“The amount retained by the bank is a fee charged by them for having rendered the banking services and cannot be treated as a commission or brokerage paid in course of use of any services by a person acting on behalf of another for buying or selling of goods. The intention of the legislature is to include and treat commission or brokerage paid when a third person interacts between the seller and the buyer as an agent and thereby renders services in the course of buying and/or selling of goods. This happens when there 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 of goods. 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 or even 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 covered and 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.”

“Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal provisions. The said principle applies not only to criminal statutes but also to provisions which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalising the assessee, who has failed to deduct tax at source and acts to the detriment of the assessee‟s property and other economic interests. It operates and inflicts hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include initiation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred.”

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