2014 (11) TMI 732 - HC - Income Tax

TDS under section 194H assessee had paid commission to HDFC on payments received from customers who had made purchases through credit cards - Whether the Tribunal was right in holding that the AO was wrong in invoking Section 40(a)(ia) of the Act Held 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 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 - 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 - the bank 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 - assessee received the sale consideration - the bank 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. There is another reason as to why Section 40(a)(ia) of the Act should not have been invoked in is the principle of doubtful penalization which requires strict construction of penal provisions - The detriment in the present case would include initiation of proceedings for imposition of penalty for concealment as was directed by the AO - a person should not be subjected to any sort of detriment unless the obligation is clearly imposed the principle should be applied as HDFC would necessarily have acted as per law thus the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Applicability of Section 194H of the Income Tax Act, 1961.
2. Disallowance under Section 40(a)(ia) of the Act.
3. Interpretation of the terms "commission" and "brokerage" under Section 194H.
4. Relationship between the bank and the respondent-assessee.
5. Principle of doubtful penalization in tax statutes.

Detailed Analysis:

1. Applicability of Section 194H of the Income Tax Act, 1961:
The core issue was whether the charges deducted by HDFC Bank on payments made through credit cards to the respondent-assessee constituted a "commission" under Section 194H of the Act. The Tribunal held that Section 194H was not applicable, as the relationship between HDFC and the respondent-assessee was not that of an agent and principal but of two independent parties on a principal-to-principal basis. The High Court upheld this view, stating that HDFC did not act on behalf of the respondent-assessee but merely provided banking services.

2. Disallowance under Section 40(a)(ia) of the Act:
The Assessing Officer had disallowed Rs. 44,65,654/- under Section 40(a)(ia) on the ground that tax was not deducted at source on the "commission" paid to HDFC. The High Court found this disallowance unwarranted, as Section 194H was not applicable. The Court emphasized that the amount retained by HDFC was a fee for banking services, not a commission or brokerage.

3. Interpretation of the terms "commission" and "brokerage" under Section 194H:
The Court referred to the definitions and interpretations of "commission" and "brokerage" as provided in various judgments, including the Gujarat High Court's decision in Ahmedabad Stamp Vendors Association vs. Union of India, which distinguished between a contract of sale and a contract of agency. The Court reiterated that for Section 194H to apply, there must be an element of agency, which was absent in the relationship between HDFC and the respondent-assessee.

4. Relationship between the bank and the respondent-assessee:
The Court analyzed the nature of the relationship between HDFC and the respondent-assessee, concluding that it was not one of agency but of two independent entities. HDFC provided a service by facilitating credit card transactions and charged a fee for this service. The bank was not involved in the buying or selling of goods and did not act on behalf of the respondent-assessee.

5. Principle of doubtful penalization in tax statutes:
The Court invoked the principle of doubtful penalization, which requires strict construction of penal provisions. Section 40(a)(ia) is a deterrent and penal provision, and its application should be clear and unambiguous. The Court held that the principle against doubtful penalization should apply, as the obligation to deduct tax at source under Section 194H was not clearly imposed in this case. The Court also noted that HDFC would have paid taxes on its income, and there was no loss of revenue.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decision that Section 194H was not applicable to the charges deducted by HDFC Bank. Consequently, the disallowance under Section 40(a)(ia) was also found to be incorrect. The Court emphasized the need for a clear principal-agent relationship for Section 194H to apply and highlighted the principle of strict construction in penal provisions.