ITAT: Payments to Gateway Providers Do Not Come Under Brokerage Therefore No TDS Will Applicable

The payments made to gateway providers are not brokerage and TDS under Section 194H of the Income Tax Act,1961 is not liable to be deducted, the Bangalore Bench of Income Tax Appellate Tribunal (ITAT) said.

The taxpayer M/s. Knowledge Hut Solutions Pvt. Ltd filed its income return for Assessment Year (A.Y) 2018-19 showing the total income at Rs 3,67,36,490. The case was chosen for limited scrutiny under CASS to confirm the issue of “verification of the genuineness of the expenses”.

Under Section 142(1) of the Income Tax Act, the taxpayer was served with the notice, and the assessment was finalized on making the addition of Rs 15,34,844/- under Section 194H of the Income Tax Act. The taxpayer disappointed with the order filed an appeal to the Commissioner of Income Tax (Appeals) which supported the AO’s decision.

The Income-Dissatisfied Taxpayer Filed the Petition to The Tribunal

The Authorized Representative (AR) representing the taxpayer argued that in this particular case, M/s. Avenue India Pvt. Ltd. and M/s. Razor Pay acts as a gateway provider that collects fees from participants on behalf of the appellant, charging a commission for their services.

After deducting the commission, they transfer the remaining amount to the appellant. Tax Deducted at Source (TDS) is withheld under Section 194H of the Income Tax Act on the commission portion only, not on the entire receipt, resulting in a TDS credit of Rs.1,32,629/-.

Furthermore, the AR presented the fact that the company disbursed Rs.16,76,041/- and Rs.9,76,530/- as payment for gateway services (commission) to M/s. Razor Pay and M/s. Avenue India Pvt. Ltd., respectively. According to the tax audit report, the appellant accounted for a commission expense of Rs.26,52,620/-. TDS of Rs.1,32,631/- at a rate of 5% was deducted under Section 194H of the Income Tax Act.

On the other hand, the Departmental Representative argued that the appellant recorded a commission expense of Rs.15,34,844/- in their books of accounts, and consequently, the Assessing Officer made an addition based on this amount under Section 194H of the Income Tax Act.

The AR contended that the case was subjected to limited scrutiny under the (CASS) to examine the issue of “verification of the genuineness of the expenses.” Therefore, any attempt to make an addition in this case exceeds the scope of limited scrutiny, and such an addition would not be in accordance with the law, warranting its deletion.

The Bench, consisting of Chandra Poojari, Accountant Member, and Ms Madhumita Roy, Judicial Member, noted that the appellant disbursed Rs. 16,76,041/- and Rs. 9,76,530/- as payment for gateway services to M/s. Razor Pay and M/s. Avenue India Pvt. Ltd. Additionally, they submitted a reconciliation statement reconciling the commission expenses with their books of accounts and the TDS returns filed.

The Tribunal recognized that the scope of limited scrutiny is restricted to verifying the authenticity of expenses, excluding considerations related to TDS payments, as was the case with the Assessing Officer (AO) and the subsequent addition. Therefore, the addition was deemed unjustified and was consequently deleted.

The Bench drew upon a precedent from the Karnataka High Court in the matter of CIT vs. Corporation Bank. In that case, it was ruled that the service charges paid by the bank to National Financial Switch and Cash Tree for processing customer payments to the assessee bank were not subject to TDS deduction under Section 194H of the Income Tax Act.

It was observed that the parties in question were service providers who collected fees from participants, including gateway payment commissions from the appellant. Following the deduction of gateway charges, they transferred the remaining collected amount from participants to the appellant.

The Tribunal concluded that the payments made to the gateway providers did not constitute brokerage, and therefore, TDS under Section 194H of the Income Tax Act was not applicable. Consequently, the appeal filed by the assessee was upheld and allowed.