May 102021
 

Facts:

Whether, a third partly viz., National Financial Switch and Cash Tree has been acting as an agent by collecting charges from the bank for its services rendered to the bank as an intermediary between the bank and its customers? Or

Whether there is a relationship between the parties shall be regarded as a principal-to-principal basis?

And therefore, whether the provisions of section 194H apply and whether the bank is liable to deduct TDS on each transaction of service charge payable to a third party.

Relevant Rules:

Section 194H – TDS on Commission, brokerage, etc.

(1) Any person, not being an individual or a Hindu Undivided Family, who is responsible for paying, on or after the 1st day of October 1991, but before the 1st day of June 1992 to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten percent.

(2) The provisions of sub-section (1) shall not apply-

(a) to such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue, by notification in the Official Gazette 4, specify in this behalf;
(b) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees.
Explanation.- For the purposes of this section,-
(i) ” commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or concerning any transaction relating to any asset, valuable article or thing;
(ii) ” professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;
(iii) where any income is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

 

Analysis of facts and Section 194H:

Mode of working:

Suppose, the credit card issued by the bank was used on the swiping machine of another bank, the customer whose credit card was used got access to the internet gateway of acquiring bank resulting in the realization of the payment.

Subsequently, the acquiring bank realizes and recovers the payment from the bank, which had issued the credit card.

Analysis of working in the eyes of law:

The relationship between the assessee and any other bank is not of an agency but that of two independent bases on a principal-principal basis.

Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, then also it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it.

if the payment was received or is receivable directly or indirectly by a person acting on behalf of another person for services rendered not being professional and for any services in the course of buying and selling of goods or in relation to any transaction relating to an asset, valuable article or thing.

Also, from a perusal of section 194H, it is evident that the provision would apply if the payment was received or is receivable directly or indirectly by a person acting on behalf of another person for services rendered not being professional and for any services in the course of buying and selling of goods or in relation to any transaction relating to an asset, valuable article or thing.

Conclusion:

Thus, in the instant case, the third party and the bank are acting as independent parties and hence, the bank is not liable to deduct TDS on service charges payable to a third-party agency.

Sensys