ITAT Holds TDS u/s 194H Not Applicable on Payment Gateway Fees; Deletes Demand Raised u/s 201 & 201(1A)

The assessee, who operates a digital payment system sanctioned by the Reserve Bank of India for the issuance and operation of prepaid instruments, was surveyed under Section 133(2A) on 07/11/2017. While conducting the survey, the Assessing Officer noted that no TDS was deducted from the payments made to two payment-gateway companies, CC Avenues and Zaaki Payment Services Pvt. Ltd. The Assessing Officer concluded that the payments were commission within the meaning of Section 194H and treated the assessee as an assessee-in-default under Sections 201 and 201(1A) and raised a demand of Rs. 19,82,522 for AY 2015-16. On similar reasoning, demands were also raised for AYs 2016-17 and 2017-18.

CIT(A)’s Ruling: The assessee filed appeals before the CIT(A), who passed a common order dated 09/10/2018 confirming the Assessing Officer’s findings and holding that the payment gateways were acting on behalf of the assessee. Aggrieved, the assessee preferred appeals before the Tribunal.

Issue Raised: Whether payments to payment-gateway service providers of commissions for handling transactions amount to commission earning TDS under Section 194H, rendering the assessee under Sections 201 and 201(1A).

ITAT’s Ruling: The Tribunal looked into the contract terms between the assessee and the payment gateways and discovered that the two entities were dealing independently and there was no aspect of supervision or control that would establish a principal-agent relationship. It was observed that the payment gateways deducted their own service fees before remitting the remaining amounts to the assessee and that the indemnity clauses contained in the agreements were standard commercial terms and not indicators of agency.

The Tribunal drew from the rulings of the Supreme Court in Bharti Cellular Ltd., the Delhi High Court in Make My Trip (India) Pvt. Ltd., and the Gujarat High Court in Ahmedabad Stamp Vendors Association, which ruled that a principal-agent relationship is a sine qua non for the application of Section 194H. It also referred to CBDT Notification No. 47/2016 dated 17.06.2016, clarifying that no TDS is deductible on credit/debit card or similar gateway charges. Applying these principles, the Tribunal held that Sections 194H, 201 and 201(1A) were not attracted in the assessee’s case.

Therefore, the orders of the lower authorities were set aside, and the Assessing Officer was directed to delete the demands raised for AY‘s 2015-16 to 2017-18. All the appeals filed by the assessee were allowed.

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