Date: 28th April 2012 The Chairman Central Board of Direct Taxes, North Block, New Delhi 110001 Respected Sir, Subject: Representation on TDS under section 194 H of the Income tax Act, 1961 on discount withheld by the acquiring bank while making payment to the Retail merchant for credit card transactions at the point‐of‐sale (POS). It is my pleasure to write to you from the Retailers Association of India (rai)! Retailers Association of India (“RAI”) is the unified voice of Indian retailers. RAI works with all the stakeholders for creating the right environment for the growth of the modern retail industry in India. It encourages, develops, facilitates and supports retailers to become modern and adopt best practices that will delight customers. RAI is the representative body of Retailers in India having over 800 member establishments including large and small retailers in the country and represents over 98000 stores in India. RAI membership includes a significant number of SMEs. We only accept a retailer as a member if they issue a cash memo for all purchases made from them by customer. We are writing to you to represent the serious concern of our members with regard to TDS on merchant service fee on credit card transactions at the point‐of‐sale (POS). This issue is of utmost importance since this would affect thousands of merchant establishments across the country. We at the Retailers Association of India (RAI) have always been supportive of RBI approach to convert existing cash based retail payments to cashless payments. But this could adversely impact credit card acceptability in the country and discourage SME retailers from accepting credit card at their outlets. ISSUE You may be aware that modern retailers encourage use of credit card in their outlet as a mode of payment for purchasing merchandise/ services from the them. Whenever the payments are made through credit cards, the retailers are in receipt of consideration after reducing ‘Merchant Service Fees’ (‘MSF’). 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in Various members of Retailers Association of India (i.e. retailers) have received show cause notice from Income Tax Authorities requiring them to pay the TDS under section 194H of the Income Tax Act, 1961 (‘Act’) along with interest and penalty. In few instances demand order has already been served by Assessing Authority and appeal has been filed by the retailer against the demand order. Our contention is that the MSF is nothing but bill discounting charges and hence, provisions of section 194H should not be applied. Our clarification for such contention is stated below: BACKROUND 1. Retailers and Acquiring bank (AB) transact on a principal to principal basis: As per the settled and accepted principal set by Courts read along with the explanation to Section 194H of the Act, the amount is considered as ‘commission’ only of the recipient have acted in capacity of the ‘agent’ while effecting the transaction of sale/ purchase of goods/ services. Therefore the existence of a principal‐agent relationship is a pre‐
requisite for applicability of the TDS provisions under section 194H of the Act. In the present set of facts, it can be well established that the AB does not in any manner, acts in the capacity of an agent of the retailers. The transaction between the AB and the retailers are effected on Principal to Principal basis without having any obligation to third party for any act or omission to act of each other. 2. Merchant service fee (MSF charges) is not in the nature of commission: The MSF charges retained by the AB are effectively in nature of bill‐discounting fee collected by the AB. Under the credit card transaction, the credit card holder (ie customer in present case) owes to pay a certain sum after availing the credit period. The transaction is akin to Bills of Exchange (‘BoE’)/ Promissory Note (‘PNote’), whereby the drawer promises to pay certain sum after a fixed credit period. The beneficiary of the BoE or P‐Note can discount the same with their bankers, who then have all rights and associated risk of receiving the payment. Given that CBDT in its Circular 681 dated 8.3.1994 have acknowledged that no taxes are required to be deducted on bill discounting fees, the same analogy equally applies to the MSF sum. 3. Acquiring bank (AB) receives income from Issuing Bank (IB )and not Retailers: Given that there are three beneficiaries / claimants viz. the AB, the Card Association ( Visa , master etc.) and IB, of the MSF charges in a credit card transaction, giving rise to discount income getting accrued in hands of the three persons. The retailers are in receipt of consideration after reducing ‘Merchant Service Fees’ (‘MSF’). For a merchant 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in this is basically a mode of payment for credit sales for which he pays discount to the network which facilitates these electronic transactions. No commission is paid by retailers either of parties. A complete flow chart of the process is as per annexure ‐1 MSF AND SECTIONWISE TDS PROVISION AS PER INCOME TAX ACT 1961 The Bank enters into a Merchant Establishment Agreement with various Merchants, for approving the Merchant's establishment for the purpose of payment processing of transactions made by credit / debit cards at the Merchant’s Establishment. In consideration of the Bank agreeing to render the payment processing services, the Merchant shall pay the Bank, the ME commission at the rate as specified in the Agreement. Under the Agreement, the Merchant expressly agrees to the conditions prescribed by the bank to enable the processing of payments for transactions made by valid cards. It is understood that the Bank is not acting as an agent of the Merchants under the Agreement. This note seeks to clarify whether withholding tax is applicable on payments of ME commission by the Merchants to the Bank. The comments in the matter are given below. We have examined the applicability of Withholding tax under sections, 194H, 194C, 194J and 194I of the Income tax Act, (“the Act”). As per our understanding the ME commission is not separately paid by the Merchant and is received by the Bank by way of processing charges or discounting charges. For eg, if the bill amount paid through the card is Rs. 100, the Merchant would get, say Rs. 97 from the Bank against the invoice. The Bank would then collect Rs. 100 from the card holder, Rs. 3 being the ME commission of the Bank. (i)Section 194H According to the provisions of section 194H of the Act, any person, not being an individual or a HUF, who is responsible for paying, to a resident, any income (exceeding Rs.2,500 in a financial year) 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 5%.(plus applicable surcharge and education cess). 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in According to Explanation (i) to section 194H, "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. As held by the Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs UOI, 257 ITR 202, the element of agency has to be there in case of all services or transactions contemplated by explanation (i) to section 194H. The relevant extracts of the judgment on page 215 is reproduced below‐ “It is also not possible to accept the contention of…..for the Revenue that the definition of "commission or brokerage" as contained in the Explanation to section 194H is so wide that it would include any payment receivable, directly or indirectly, for services in the course of buying or selling of goods and that, therefore, the discount availed of by the stamp vendors constitutes commission or brokerage within the meaning of s. 194H. If this contention were to be accepted, all transactions of sale from a manufacturer to a wholesaler or from a wholesaler to a semi‐
wholesaler or from a semi‐wholesaler to a retailer would be covered by section 194H. To fall within the aforesaid Explanation, the payment received or receivable, directly or indirectly, is by a person acting on behalf of another person (i) for services rendered (not being professional services) or (ii) for any services in the course of buying or selling of goods or (iii) in relation to any transaction relating to any asset, valuable article or thing. The element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to section 194H. If a car dealer purchases cars from the manufacturer by paying price less discount, he would be the purchaser and not the agent of the company, but in the course of selling cars, he may enter into a contract of maintenance during the warranty period, with the customer (purchaser of the car) on behalf of the company. However, such services rendered by the dealer in the course of selling cars does not make the activity of selling cars itself an act of agent of the manufacturer when the dealings between the company and the dealer in the matter of sale of cars are on "principal to principal" basis. This is just an illustration to clarify that a service in the course of buying or selling of goods has to be something more than the act of buying or selling of goods. When the licensed stamp vendors take delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the two activities (buying from the Government and selling to the customers) can be termed as the service in the course of buying or selling of goods.” Similar decision was rendered by the Pune Tribunal in the case of Government Milk Scheme v ACIT, 281 ITR 88 (ITAT), where the Tribunal held that the amount paid by the assessee, a milk processor, as reimbursement of transport costs, container and chilling charges, etc., to milk 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in vendors, was not commission even if it was mentioned as such in its books of accounts. Since there was no agency between the assessee and the milk centres, the assessee was not liable for deduction of tax at source. Thus, ME commission received by the Bank for processing of payment or in substance, discounting charges of bills cannot be regarded as commission or brokerage for any services, since the Bank, as already mentioned above, is not acting as an agent of the Merchant. (ii)Section 194J The provisions of section 194J of the Act are discussed below: Section 194J of the Act requires tax to be deducted at source in respect of payment of fees for professional or technical services exceeding Rs. 20,000/‐ during the financial year. Vide the Taxation Laws (Amendment) Act 2006, the list of items has been expanded to include royalty or sums referred to in section 28(va) (non‐compete fees, payments for not sharing any know‐how, copyright, trademark, etc). For the purposes of this section the expression “professional services” has been defined to mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA (i.e. authorized representative, film artiste, company secretary, information technology). The payment of ME commission are not for “professional services”. The term “royalty” has the same meaning as in Explanation 2 to section 9(1)(vi). Clearly the ME commission payment for the aforesaid services rendered by the Bank can neither be royalty nor payments as referred to in section 28(va) of the Act. The payment of ME commission cannot be considered as for the ‘use of equipment’ since the equipment is installed by the Bank in the premises of the Merchant to facilitate the payment processing and no part of ME commission is for the use of equipment. The term ‘fees for technical services’ has the same meaning as it has in Explanation 2 to section 9(1)(vii) of the Act. The Madras High Court in the case of Skycell Communications Ltd. vs. DCIT (251 ITR 53) has dealt with the meaning of ‘fees for technical services’. It observed that the definition shows that consideration paid for the rendering of any managerial, technical or consultancy service, as also consideration paid for the provision of services of technical or other personnel, would be regarded as fees paid for ‘technical service’. Thus, while stating that “technical service” would include managerial and consultancy services, the Legislature has not set out with precision as to what constitutes “technical service”. Having regard to the fact that the term is to be understood in the context in which it is used, “fees for technical services” 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with “technical” is involving or concerning applied and industrial science. Technical service’ referred to in section 9(1) contemplates rendering of a ‘service’ to the payer of the fee. Mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. It was observed that when a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. He agrees to pay a charge for the use of the airtime. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not make it provision of a technical service to the subscriber. What applies to cellular mobile telephone service is also applicable in fixed telephone service. Neither service can be regarded as “technical service” for the purpose of section 194J. In the instant case, it is possible to argue that there is nothing technical about the above services rendered by the Bank. It is a standard service provided to anyone for a fee. Hence provisions of section 194J in connection with FTS should not be applicable for payment of ME commission. (iii)Section 194C The issue may still arise as to whether the above services are liable to TDS under section 194C. Section 194C of the Act requires tax to be deducted at source on payments made to a contractor/ sub‐contractor for carrying out any work (including the supply of labour for carrying out any work). For the purposes of the said section, an inclusive definition of the term ‘work’ is provided to include (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods and passengers by any mode of transport other than by railways; (d) catering. The Delhi High Court in the case of S.R. F. Finance Ltd. v. C.B.D.T. [211 ITR 861] has held in the context of section 194C of the Act as under:‐ “Any work”, certainly is a term of wide import; but it is not so wide as to comprise within its scope the obtaining of the supply of labour to carry out the work, because, the latter concept is essentially, a concept falling within the sphere of “services”. However, the term “any work” is wide enough to cover any kind of work which one can get carried out through another. The essentiality is that, it should be a “work” which is to be “carried out”. It is possible to take a view that the payment is not for carrying out any work (including supply of labour) and is also not covered by the extended definition of work as per Explanation III to 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in section 194C. In this regard, we may also make a reference to Circular no.681 dt. 28‐3‐1990, the relevant extracts of the Circular is reproduced below‐ “The provisions of section 194C would not apply in relation to payments made to banks for discounting bills, collecting / receiving payments through cheques / drafts, opening and negotiating letters of credit and transactions in negotiable instruments” ME commission is nothing but bill discounting charges and hence, provisions of section 194C should not be applied in view of the above circular. In view of the above, there is an urgent need to issue a clarification on above basis. Since large number of retailers will be adversely affected for accepting credit card if the TDS requirement is made applicable, an early resolution of the matter would help to solve the genuine problem faced by them. We hope and believe that you will receive our representation favourably and look forward to your kind action in this regard Warm Regards, Yours sincerely, Kumar Rajagopalan CEO 111/112, Ascot Centre, Near Hotel ITC Maratha, Sahar Road, Sahar, Andheri (E), Mumbai – 400099
Tel: +91 22 28269527 – 29 Fax: +91 22 28269536 Email: [email protected] Website: www.rai.net.in Annexure - 1
Flow Chart of Credit Card Payment
Issuing banks
Card Associations
Visa / Master / etc
Acquiring Banks
Inter Bank agreements
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Goods given
Retailers
(Merchant Establishments)
Customers
Credit card in lieu of cash