TaxTMI 
TaxTMI 
2019 (7) TMI 866
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....e Ld. CIT(A) erred in directing the Assessing Officer to recompute the disallowance u/s.14A read with Rule 8D by taking into consideration the actual indirect expenses, without appreciating the fact that the AO has properly recorded his satisfaction for invoking the provisions of rule 8D and therefore since Rule 8D is invoked, the disallowance has to be worked out as per the formula prescribed therein and there is no scope for any deviation thereform?" ii) "Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs. 34,62,22,786/- under section 40(a)(ia) of the IT Act on account of not deducting the TDS on credit card commission charged by bank on credit card transactions?" iii) "Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that there is no relationship of a Principal and Commission Agent between the assessee and the acquired bank, without appreciating the fact that the acquirer bank, without appreciating the fact that the acquirer bank acts as a conduit or middleman between the assessee and the issuing bank for credit card processing services iv....
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....ode without involving much human intervention, then it cannot be treated as a technical service u/s. 194J of the Act, without appreciating that such systems necessarily involve human intervention?" ix) "Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs. 6,76,46,117/- under section 40(a)(ia) of the IT Act on account of not deducting the TDS on cash pick up services?" The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the ACIT 9(3)(2) be restored. The appellate craves leave to amend or alter any grounds or add a new ground which may be necessary." 3. The brief facts of the case are that the assessee is engaged in the business of readymade garments and other products. 3.2 During the course of assessment proceeding conducted by the AO u/s 143(3) read with Section 143(2) of the 1961 Act, on perusal of P&L account of the assessee for the year under consideration, it was observed by the AO that the assessee had claimed credit card charges of Rs. 34,36,22,786/- under head 'Other expenses' and on which the assessee had not deducted Income-tax at source under the....
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....ith equipment and software to accept cards, promotional materials, customer service and other necessary aspects involved in card acceptance. The acquiring bank also deposits funds from credit card sales into a merchant's account. Interestingly enough, many merchants don't recognize their acquiring bank as the primary provider of their merchant account. Acquiring banks are playing an increasingly hands-off role as the bankcard system evolves. Acquiring banks often enlist the help of third-party independent sales organizations (ISO) and membership service providers (MSP) to conduct and monitor the day-to-day activities of their merchant accounts. * Issuing Bank (Cardholder Bank) - An issuing bank issues credit cards to consumers. The issuing bank is also a member of the card associations (Visa and MasterCard). Issuing banks pay acquiring banks for purchases that their cardholders make. It is then the cardholder's responsibility to repay their issuing bank under the terms of their credit card agreement. * Card Associations (Visa and MasterCard) - Visa and MasterCard aren't banks and they don't issue credit cards or merchant accounts. Instead, they act as a ....
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....om the Front-End Network and settles them through the interchange system. The backend generates daily ACH files for merchant settlement. Other functions typically handed on the back-end include chargeback handling, retrieval request and monthly statements. 4.2.1 The online fund transfer is a Two-Part Process and can be briefly explained as under:- Processing a payment card transaction involves two stages; > Authorization, where an electronic request is sent through various parties to either approve or decline the transaction; and Clearing and Settlement, where all parties settle their accounts and get paid. > Authorization: 1. Cardholder presents payment card as payment at Merchant Point-of-Sale 2. Merchant enters card into a physical Point-of-Sale Terminal or submits a credit card transaction to a Payment Gateway on behalf of a customer via secure connection from a web site, retail location, MOTO center or a wireless device. 3. Payment Gateway receives the secure transaction information and passes it via a secure connection to the Merchant Acquirer's Front-End Processor 4. The Merchant Acquirer's Front-End Processor submits the transaction to the Associatio....
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....tomer through credit cards and remit the amount to the assessee's account after deducting their commission. This is a different mode of payment in which the assessee is not making any payment but the service provider itself deduct the commission from the amount payable. This mode of payment between the assessee and the Banks is clearly covered by the provisions of section 194H which says that payment "by any other mode". There is no doubt that the Banks provide credit card facilities to the assessee company and for that commission Is charged by them, but there was no bar on the assessee to deduct TDS on such payments / expenses debited in the Profit & Loss Account Therefore, provisions of section 194H of the Act is clearly attracted to the transactions between the Banks and the assessee for charging commission on providing credit card services. The assessee is liable to deduct tax on the payment of commission (one mode is to send debit note to the concerned Bank after depositing TDS amount to the Government Account), which assessee did not do. According to section 40(a) (ia) of the Act, any payment of commission on which no TDS has been deducted is not allowed as deduction unde....
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....on 194H of the Act are not applicable on the above mentioned amounts retained by the banks as it was in the nature of discounting in consideration of immediate payment made by the banks to the assessee. However, the AO held that such a payment made for the use of the credit card, internet payment gateway to enable the assessee to collect the payments made by the customers to it for orders placed through facility by the said customers is squarely covered by the definition of "commission or brokerage" given in explanation (i) below the third proviso to section 194H of the Act. 6.2.3 Further, it is also pertinent to mention that identical issue in Appellant's own case under appeal no. CIT(A)-16-Addl.CIT-8(1)/IT-207/2013-14 was there in the previous year pertaining to AY 2011-12 and my Ld. predecessor had allowed the claim of the Appellant vide order dated 09.03.2015. The relevant part of said order are reproduced below: "The ITAT, Mumbai noted that similar issue has been considered by the Jaipur bench of the Tribunal in the case of Gems Paradise ITA No. 746/JP/20n (AY2008-09) dated 02/02/2012 and the Tribunal held that the provisions of section 194H of the Act are not applicable a....
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.... read with Section 194H of the 1961 Act is raised by Revenue in memo of appeal filed with tribunal vide ground number (ii) to (viii). The Ld. CIT-DR opened the argument and fairly submitted before the Bench that this issue is squarely covered by decision of Mumbai-tribunal in the case of Jet Airways India Ltd.(supra). The Ld. Counsel for the assessee also submitted that the issue is covered by decision of coordinate benches of the tribunal in the case of Jet Airways India Ltd.(supra). Further, it is also brought to our notices by learned counsel for the assessee that Mumbai-tribunal in assessee's own case for AY 2011-12 in ITA no. 3968/Mum/2015 AY 2011-12 vide appellate order dated 31.05.2017 has now adjudicated this issue in favour of the assessee.The said appellate order is filed by the assessee which is placed in the file. Our attention was also drawn by learned counsel for the assessee to Notification No. 56/2012 (F.No. 275/53/2012-IT(B), dated 31.12.2012, wherein Central Government has notified that no deduction of income-tax at source under Chapter XVII of the 1961 Act shall be made, inter-alia, on credit card or debit card commission for transactions between the merchant est....
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....ited an expenditure of Rs. 24,64,25,637/- in the P&L Account on account of credit card charges. On being asked to explain, assessee explained that it is engaged in the business of sale of readymade garments and other products and it receives payments from customers through credit cards. The aforesaid expenditure reflects the charges paid to the banks for collecting payments and is on account of service fees/ discount/ merchant discount rate/ commission, etc. The Assessing Officer was of the view that such charges are in the nature of 'commission', for which the requisite tax is required to be deducted at source under section 194H of the Act. Since the assessee company has not deducted the requisite tax at source, the expenditure was liable to be disallowed under section 40(a)(ia) of the Act. Hence, a disallowance of Rs. 24,64,25,637/-/- The CIT(A) has since set-aside the disallowance by making the following discussion:- "3.2.11 The AO's order, the contentions of the appellant and the materials on record have been considered. In the Mumbai ITAT decision in the ITO(TDS) v Jet Airways (India) Ld. [ IT Appeal Nos. 7439,7440 & 7441 (Mum) 2010 ] dated 17/07/2013, proceedings were....
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....ates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, payments made to the banks on account of utilization of credit card facilities would be in the nature of bank charges and not in the nature of commission within the meaning of section 194H of the Act and hence no TDS is required to be deducted u/s 194H of the Act. Respectfully following the jurisdictional Mumbai ITAT decision as above, the addition made u/s 40(a)(ia) is deleted." 5. Before us, it was a common point between the parties that the issue in question is directly covered by the decision of the Mumbai Tribunal in the case of Jet Airways (India) Ltd.(supra),which has been followed by the CIT(A). It was also a common point between the parties that the said decision of the Tribunal continues to hold the field and the same has not been altered by any higher authority. Ostensibly, our co-ordinate bench, in the case of Jet Airways(India) Ltd. (supra) has concluded that credit card charges paid to the collecting banks....
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....RD OF DIRECT TAXES) NOTIFICATION New Delhi, the Dated: 17th June, 2016 Notification No. 47/2016 INCOME TAX S.O. 2143(E).-In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961) and in supersession of the notification of the Government of India, Ministry of Finance (Department of Revenue) number S.O. 3069 (E) dated 31st December, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), the Central Government hereby notifies that no deduction of tax under Chapter XVII of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, or to any payment systems company authorised by the Reserve Bank of India under Sub-section (2) of Section 4 of the Payment and Settlement Systems Act, 2007 (51 of 2007), namely :- (i) bank guarantee commission; (ii) cash management service charges; (iii) depository charges on maintenance of DEMAT accounts; (iv) charges for warehousing services for commodities; (v) underwriting se....
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....on carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section: Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees. 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 in relation to any transaction relating to any asset, valuable article or thing, not being securities; (ii) the expression "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 profes....
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....ionary. The expression "discount", it was observed, is an allowance or deduction made from the gross sale on any account whatsoever. A "deduction" normally represents a reduction in the original price or a debt such as in case of securities (e.g. treasury bills), which are issued below the face value and are redeemed at the face value. Commission, it was held, is a reward paid to an agent as well as to a salesman, executor, trustee, broker or bailee and is calculated as a percentage of the amount of the transaction or on the profit of the principal. It is a fee paid to an agent or an employee for generating a piece of business or performing a service. In such cases, normally, there exists a fiduciary duty, which has to be discharged by the person to whom commission is paid. The following excerpt from the decision of the Bombay High in Harihar Cotton Processing Factory v. CIT [1960] 39 ITR 594 was referred to with approval:- 'The expression "commission" has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties such as for instance of an ....
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....[2014] 220 Taxman 403/[2013] 37 taxmann.com 391 has held that the words "by a person acting on behalf of another person" imply element of agency and must be present in all such services or transactions in order to fall within the expression "commission" and "brokerage". Reference was made to definition of the term "agent" in the Indian Contract Act and the implication thereof and it was observed that the contract between a principal and an agent primarily is a contract of employment to bring about a legal relationship with a third party and the agent either actually or by law is held to be authorized or employed by the first i.e. the principal, whom he represents. Representative character and derivative authority are distinguishing features of an agent. It was accordingly held that provisions of Sections 194H of the Act were not attracted in the case of stamp vendors. 12. The expressions "commission" or "brokerage" are words of general and common parlance used both commercially and by the common man on the street. Clause (i) expressly seeks to define the expression "commission" or "brokerage" but states that it will include payments received or receivable, directly or indirectly ....
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....nd an agent exists and not otherwise. This interpretation has been consistent and uniformly applied while interpreting clause (i) of the Explanation to Section 194H of the Act. Appropriate in this regard would be to refer to the decision of the High Court of Delhi in CIT v. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118 wherein Explanation clause (i) to Section 194H of the Act had come up for consideration and on interpretation it was held that it would apply only if payment was received or receivable directly or indirectly by a person acting on behalf of another person for (i) services rendered (not being professional) and (ii) for any services in the course of buying or selling of goods or in relation to any transaction relating to an asset, valuable article or thing. The judgment records that the counsel for both the parties, i.e. the Revenue and the assessee, had agreed that the element of agency was to be established in all the aforesaid circumstances (see page 156 placitum 9 of the ITR citation). Thus, this contention if raised would not stand judicial scrutiny on the principles of consistency and certainty. Even otherwise, the view expounded and accepted is plausible, ....
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.... 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. 17. 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 crea....
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....uishing features are brought to our notice by learned CIT-Dr in this year under consideration before us vis-a-vis immediately preceding year. Thus, we decide this issue in favour of the assessee by confirming the appellate order passed by Ld. CIT(A) by Respectfully following the decision of the Mumbai-tribunal in assessee's own case for AY 2011-12 and holds that no income-tax was required to be deducted at source u/s 194H on credit card charges paid by assessee to Banks on payments received from customers on purchases made through credit card. We also note that it is also not the grievance of the Revenue that these credit card charges were paid by assessee to foreign banks or to Indian Banks who are not listed in Second Schedule to RBI Act, 1934, in contravention of aforesaid notifications issued by Central Government. The learned CIT-DR as well learned counsel for the assessee did not pointed out any other judicial precedent of Hon'ble Superior Courts taking a contrary view. We are guided by the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992) 193 ITR 321(SC) so as to maintain consistency and judicial discipline by following preceding ....
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.... case of ITO(TDS) v. Jet Airways(supra), vide appellate order dated 23.08.2016 by holding as under:- " 6.45 I have perused the submissions made by the Appellant in response to Ground No.2 wherein the applicability of TDS on credit card charges has been thoroughly discussed. I find that the decision of the Mumbai ITAT Bench in the ITO(TDS) v jet Airways (India ) Ld. [IT Appeal Nos. 7439,7440 & 7441 (Mum) 2010] dated 17/07/2013, can be safely applied in case of applicability of TDS on 'Cash Pick Charges', The relevant extract of the said decision is given as follows: "Proceedings were initiated u/s 201(1)/201(1A) of the Act in connection with the applicability of TDS on amounts retained by the banks in respect of the air tickets booked through credit cards. The Appellant during the course of proceedings stated that the provisions of section 194H of the Act are not applicable on the above mentioned amounts retained by the banks is in the nature of discounting in consideration of immediate payment made by the banks to the assessee. However, the AO held that such a payment made for the use of the credit card, internet payment gateway to enable the assessee to collect the pay....
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....ional Litigation Policy expressly stated that the Government must cease to be a compulsive litigant. The philosophy, that the matters should be left to the Courts for ultimate decision is to be discarded and the easy approach that 'let the Court decide', must be eschewed and condemned. The Revenue has not applied its mind in this direction. No attempt is made to reduce the pendency of the litigation by filtering frivolous and vexatious matters from meritorious ones and said cases are withdrawn. The only measure taken for reducing the litigation is, by raising the monetary limit. However, as the same is made prospective, it had no application to the pending cases. Therefore, the said Instruction No. 3/11 do not fulfil the requirement prescribed by the National Litigation Policy. It only partially satisfies the requirement in respect of future litigation. Under the aforesaid instruction, the crucial date is the date of filing of the appeal. It is that date when the tax effect is less than the monetary limit prescribed, the Revenue is precluded from filing such appeals. Though the date of filing of the appeal may be the criteria, that by itself would not provide a rationale ....
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....nt, this Court held that a beneficial circular has to be applied retrospectively while oppressive circular has to be applied prospectively. Thus, when the circular is against, the assessee, they have right to claim enforcement of the same prospectively". 27, In the instant case, the instruction No. 3/11 is more beneficial than Instruction No. 2/05. If instruction No.3/11 is also made applicable to the pending appeals before this Court, it would grant relief to the assessee. Apart from granting relief to the assessee, if number of appeals pending before this Court are disposed of on the basis of the said circular, the precious time which would be saved by this Court could be better utilized for deciding disputes where tax effect is enormous. That apart, the duration, an appeal takes in this Court would be reduced as desired by the National Litigation Policy." 6.4.7 The Appellant has argued that "the notification u/s 197A(1F) issued by the CBDT granting exemption from TDS on payment of certain categories including cash management services, vide Press Information Bureau, Government of India, dated 4th January 2013 to mitigate compliance burden on businesses who are using the finan....
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....judicated in preceding para's of this order issue of allowability of credit card charges on which no income-tax was deducted at source under Chapter XVII-B of the 1961 Act. Our decision while adjudicating disallowance of credit card charges in preceding para's of this order shall apply mutatis mutandis to the disallowance of charges for cash pick up facility( or also called as cash management services) paid by assessee to banks for availing these services. Thus this issue being covered by ground no. ix raised by Revenue in its appeal filed with tribunal is effectively decided in favour of the assessee. The Revenue fails on this ground.We order accordingly. 11. The next issue raised by Revenue vide ground number (i) in memo of appeal filed with tribunal concerns itself with deletion by learned CIT(A) of disallowance of expenditure of Rs. 51,66,864/- made by AO u/s. 14A of the 1961 Act read with Rule 8D of the Income-tax Rules, 1962. The assessee did not made any disallowance of expenditure incurred for earning of an exempt income u/s 14A of the 1961 Act while filing its return of income with Revenue. The assessee claimed before AO that it did not earn any exempt income during the y....
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....ade investments out of it is own interest free funds available with it and thirdly because the assessee was granted relief by learned CIT(A) on similar facts for immediately preceding year viz. AY 2011-12, vide appellate order dated 23.08.2016 passed by learned CIT(A) for AY 2012-13. 13. The matter has now reached tribunal at the behest of Revenue who is aggrieved by appellate order passed by learned CIT(A) granting relief to the assessee.At the outset contention has been raised by Ld. Counsel for the assessee that assessee has not earned any exempt income during the year under consideration. The learned counsel for the assessee relied upon decision of Hon'ble Delhi High Court in the case of Cheminvest Limited v. CIT reported in (2015) 378 ITR 0033(Del.), wherein Hon'ble Delhi High Court has held that in case no exempt income is received by assessee, no disallowance of expenses u/s 14A are warranted. It was also submitted by learned counsel for the assessee that the issue is squarely covered in favour of the assessee by decision of Hon'ble Bombay High Court in the case of PCIT v. Ballarpur Industries Limited in ITA No. 51 of 2016, vide judgment dated 13.10.2016, wherein Hon'ble Bo....
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....talling Rs. 25,87,100/-. 7. Before the CIT(A), assessee contended that though it had not received any dividend income in this year, yet a suo-motu disallowance of Rs. 2,55,750/- was offered towards section 14A of the Act. With regard to the disallowance out of interest expenditure, assessee made varied submissions, which, inter-alia, included an assertion that the total own non-interest bearing funds were in excess of the investments made during the year under consideration, and thus, no interest expenditure was attributable to such investments. Therefore, it was contended that no interest expenditure can be subjected to disallowance under section 14A of the Act. The CIT(A) accepted the aforesaid plea and has recorded a finding that the own non-interest bearing funds of the assessee are sufficient to cover the investment in the tax free securities, therefore, following the judgment of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 313 ITR 340(Bom), it has to be inferred that the investments have been made out of interest free funds available with the assessee. In this background, the CIT(A) deleted the disallowance made out of interest ....
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....ited. The assessee has rightly not pressed its contentions before the Bench as was earlier taken before authorities below that no disallowances of expenditure u/s 14A can be made in case of strategic investments, keeping in view decision of Hon'ble Supreme Court in the case of Maxopp Investment Limited(supra). Thus, so far as plea of non applicability of provisions of Section 14A on strategic investments made by assessee, the said plea stands dismissed in view of decision of Hon'ble Supreme Court in the case of Maxopp Investments Limited(supra). 14.2 The assessee has undisputedly not earned any exempt income during the year under consideration. Even learned CIT-DR also admitted this position before us. Perusal of the audited financial statements for the year ended 31.03.2012, will reveal that interest free own funds comprising of share capital and reserves were to the tune of Rs. 1161.48 crores as at 31.03.2012, while the same were to tune of Rs. 1100.86 crores as at 31.03.2011. The investments are at Rs. 9.99 crores as at 31.03.2012 and also at same level as at 31.03.2011. The factum of availability of own interest free funds available with assessee and also investments made by ....
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...., which, inter-alia, included an assertion that the total own non-interest bearing funds were in excess of the investments made during the year under consideration, and thus, no interest expenditure was attributable to such investments. Therefore, it was contended that no interest expenditure can be subjected to disallowance under section 14A of the Act. The CIT(A) accepted the aforesaid plea and has recorded a finding that the own non-interest bearing funds of the assessee are sufficient to cover the investment in the tax free securities, therefore, following the judgment of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 313 ITR 340(Bom), it has to be inferred that the investments have been made out of interest free funds available with the assessee. In this background, the CIT(A) deleted the disallowance made out of interest expenditure of Rs. 23,31,350/- and retained the disallowance of Rs. 2,55,750/- suo-motu made by the assessee. Against such a decision of the CIT(A), Revenue is in appeal before the Tribunal. 8. At the time of hearing, the Ld. Departmental Representative has not controverted the factual finding of the CIT(A) to the....