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ITA.No.216/Hyd/2014
Twin EDS (e-seva), Hyderabad.

IN THE INCOME TAX APPELLATE TRIBUNAL


HYDERABAD BENCHES “B” : HYDERABAD

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER


AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER

ITA.No.216/Hyd/2014
Assessment Year 2010-2011

Twin EDS (e-seva) The Income Tax Officer,


Hyderabad. vs. Ward-14(3),
PANHYDE00521D Hyderabad
(Appellant) (Respondent)

For Assessee : Mr. A.V. Raghuram


For Revenue : Mr. Rajat Mitra

Date of Hearing : 10.12.2014


Date of Pronouncement : 29.12.2014

ORDER

PER B. RAMAKOTAIAH, A.M.

This appeal by assessee is directed against the


order of the Ld. CIT(A), Vijayawada dated 27.11.2013 on the
issue of levy of demand and interest under section 201(1) and
201(1A) of the Income Tax Act, 1961. Assessee has raised the
following grounds in the appeal :

1. “The learned CIT(A), erred in apply the provisions of


section 194C without considering the fact that there is
no contract between assessee and HDFC Bank.

2. The learned CIT(A) has wrongly interpreted the several


clauses of agreement between assessee and HDFC
bank without considering the fact that it was an
arrangement in the nature of alliance or joint venture.

3. The learned CIT(A) failed to appreciate the fact that the


assessee is engaged in public utility services and the
customers were given a facility of bank payment for
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Twin EDS (e-seva), Hyderabad.

their convenience and at their cost without any


financial implication for the assessee.”

1.1. Assessee also raised an additional ground as


under :

“On the facts and in the circumstances of the case,


since the HDFC Bank (Deductee) has already
accounted for the payment and paid taxes, no demand
can be raised under section 201(1) and section 201(1A)
of the Act.”

1.2. Since the additional ground is only a legal ground,


after considering the objections of the learned D.R. additional
ground is admitted.

2. Briefly facts of the case are that assessee is


involved in e-seva on behalf of State Government. Assessee has
entered into an agreement with HDFC for providing co-branded
credit cards by name “e-seva HDFC Bank Card’. It was the
contention of A.O. that HDFC Bank has withheld an amount of
Rs.1,93,93,930 while making credit card payments to assessee
and as assessee is having a principal-agent relationship the
amount withheld by the bank is in the nature of commission
as laid down under the provisions of section 194A of the Act.
Since no TDS was deducted by assessee, A.O. vide his order
dated 29.03.2012 raised a demand of Rs.19,39,393 under
section 201(1) and Rs.7,97,464 as interest under section
201(1A).

3. Assessee aggrieved and preferred appeal to Ld.


CIT(A) and submitted that there was no principal-agent
relationship between the two parties and both of them are
having principal to principal relationship. It is further
contended that assessee is not providing any services to HDFC
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Twin EDS (e-seva), Hyderabad.

and HDFC only credits the amount payable to e-seva while


paying commission to its Merchant establishments/customers,
therefore, question of receiving commission or allowing
commission by e-seva does not arise. The Ld. CIT(A) noticed
that provision of section 194H are not applicable and so asked
the assessee whether provisions of section 194C are
applicable. It was submitted by assessee that there is no
contract between HDFC and assessee and agreement entered
by them is in the nature of alliance to join together by
providing credit card facilities to citizens. It is further argued
that the said agreement do not contain any
consideration/intention and therefore, it is not of a contract for
any work or service contract. It was further submitted that
provision of section 194C would not apply in relation to
payments made to banks for discounting bills, collecting
receiving payments through the cheque deposits, drafts, letter
of credit etc., as per Board’s Circular No.681 dated
08.03.1994. Ld. CIT(A) however, did not agree and treated the
amount as covered by provisions of section 194C and
thereafter, affirmed the demand raised by assessee by stating
as under :

“4. I have carefully gone through the Assessment order,


the information on/written submissions furnished by the
appellant. In this case, provisions of Sec.194H are not
applicable since there is an agreement between the
parties. On a perusal of the agreement between the
appellant and HOFC Bank, it is observed that this
agreement is nothing but contract for rendering services.
Several clauses such as 1.1, 1,2, 1.3, 1.8, 1 9, clause 2 of
obligations at second party, 5.2, 6,1, 6.5 (confidentiality),
clause 7 (termination) prove that there exists a contract
between the two parties. Section 194C is applicable to
services rendered also. Even though there is no mention In
the agreement about the consideration to be paid, the
consideration paid/received was resulted because of the
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Twin EDS (e-seva), Hyderabad.

fulfilment of the terms of this contract. So provisions of Sec


194C are clearly applicable in this case. The CBDT circular
quoted by the appellant is not applicable in this case since
the payments made to HDFC Bank are not tor discounting
bills, collecting I receiving payments through
cheques/drafts opening and negotiating letters of credit
and transactions In negotiable instruments. The AO has
erroneously treated this payment as commission under the
provisions of Sec.194H of the Act. In the light of the above
position. the A.O. is directed to treat this payment as
payment made in pursuance of a contract and apply
provisions of Sec.194C in place of Sec.194H and
recalculate the demand accordingly.”

4. Ld. Counsel referring to the agreement between


assessee and HDFC submitted that they have only entered into
an alliance for providing facility to customers by way of e-seva
HDFC Bank Card which offered benefits for both e-seva service
and credit card service, in addition other value added benefits
and facilities as detailed in Annexures 1 and 2 to the
agreement. He further referred to the obligation of each party
and submitted that there is no consideration payable by either
party. Therefore, there is no work contract between the two
parties. In fact, it is not even a contract for any consideration
but only an alliance to provide service to the ultimate e-seva
customers. It was submitted that Ld. CIT(A) was wrong in
confirming the demand under section 194C while accepting
provisions of section 194H are not applicable. Since the
provisions of section 194C are not applicable, the demand has
to be cancelled.

4.1. On a querry by the Bench, how the amounts are


paid by HDFC Bank to e-seva and how the amount of
Rs.1,93,93,930 was arrived at by A.O., he placed on record the
statements obtained from HDFC Bank by A.O. and submitted
that assessee was not aware how the amount was crystallized
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or quantified. Further, Ld. Counsel referred to the order of A.O.


to submit that neither commission nor any payments are made
by assessee to HDFC Bank and the amount of commission/
discount if any, paid by HDFC is to the merchant
establishments for utilizing the credit card but not by utilizing
e-seva services. It was submitted that demand was quantified
wrongly.

5. Learned D.R. however, supported the Orders of Ld.


CIT(A).

6. We have examined the rival contentions and


perused the details placed on record. A.O. order in this regard
is factually correct but interpretations raised by him are
wrong. As far as nature of transaction is concerned, A.O. has
recorded the following :

“If the nature of transaction is analyzed it is seen that


there are five players in a credit card transactions namely:

1. Credit card holder (Customer)


2.Credit card issuing bank
3.Credit card acquiring bank
4.Retail merchant
5.Bill settling agency

An issuing bank issues credit card to a customer. An


acquiring bank provides swiping machine to retail
merchant. Bill settling agency which is Visa/Master Card
facilitates transfer of bill amount.

When a retail merchant swipes a credit card for receiving


payment from customer then bill details and amount are
forwarded to the acquiring bank which makes payment of
the bill amount to the retail merchant and withholds its
discount in nature of commission for providing services to
the retail merchant. The acquiring bank then through Bill
Settling Agency recovers the bill amount from the issuing
bank. Thus the acquiring bank facilitates recovery of bill
amount on behalf of retail merchant for which it charges
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Twin EDS (e-seva), Hyderabad.

discount in nature of commission. Thus the acquiring bank


renders services for recovery of the bill amount to the
retail merchant and hence acts as agent of the retail
merchant. As the Principal-Agent relationship is
established between the retail merchant (in the instant
case Twins-Principal and the acquiring bank (in the
instant case HDFC Bank -Agent), M/s. Twins is required
to deduct tax at source u/s.194H of IT Act.

It is not also out of place to mention here that


though the commission charges. are withheld by the
acquiring bank while making a payment to the retail
merchant though there is a constructive payment, the
assessee is liable to make the TDS.”

6.1. Thus, as can be seen from the order of A.O. itself,


the principal-agent relationship is with reference to HDFC
Bank and the retail merchant but not the e-seva provider. It is
also recorded by A.O. that the commission charges are
withheld by acquiring bank while making payment to retail
merchant. The commission or discount was provided by HDFC
Bank to the retail merchant but not by e-seva service provider
ie. assessee. Thus, in the transaction between credit card
holder and the Bank, e-seva service has no role to play. As far
as credit card holder is concerned, the amount payable to e-
seva is charged to his account and retail merchant acts as a
mediator for remitting amount to e-seva by utilizing the HDFC
Bank. As far as HDFC Bank is concerned, it gives
discount/commission to the retail merchant for utilizing the
facility of the Bank. Thus, if any principal-agent relationship is
existing that is between the Bank and the retail merchant but
not between Bank and e-seva. In our opinion, the A.O. has
wrongly invoked the provisions of section 194H against the
assessee who is nowhere connected with the commission paid
by HDFC to the retail merchant. Moreover, the Ld. CIT(A) has
further erred in confirming the amount under section 194C.
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Twin EDS (e-seva), Hyderabad.

There is no contract more so, any work contract between


HDFC and assessee. As seen from the terms of agreement, no
services are rendered by e-seva to HDFC or vice-versa. Both of
them have entered into an alliance for promoting the ‘e-seva
HDFC Credit Card’ for the use of customers not only for
remitting e-seva amounts but also for utilizing it as a general
credit card for certain value added benefits. This does not
involve any contract between these parties, so as to invoke
provisions of section 194C. Since, Ld. CIT(A) already held that
provisions of section 194H are not applicable to the facts of the
case and since provisions of section 194C are also not
applicable, demand raised by A.O. cannot be sustained at all.
Not only that, we are also not sure on what basis the A.O. has
arrived at the amount, if at all any amount is withheld by
HDFC Bank, it is not out of amount paid to e-seva but out of
the amounts payable to merchant Banker for using the credit
facility. How that amount can be attributable to e-seva is not
explained by A.O. As seen from the details placed on record,
except the cards settlement details, no other details are
available. Moreover, assessee was not given any opportunity on
what basis amounts were crystallized. Not only on the facts
but also on legal principles, the A.O. action cannot be
sustained at all in raising demands unnecessarily. In view of
this, we have no hesitation in setting aside the order.
Assessee’s grounds are allowed.

7. In the result, appeal of the assessee is allowed.


Order pronounced in the open Court on 29.12.2014.

Sd/- Sd/-
(SAKTIJIT DEY) (B.RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 29th December, 2014
VBP/-
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ITA.No.216/Hyd/2014
Twin EDS (e-seva), Hyderabad.

Copy to

1. Twin EDS (e-Seva), Hyderabad. C/o. M/s. Mahesh,


Virender & Sriram, Chartered Accountants, 6-3-788/36 &
37A, Ameerpet, Hyderabad.
2. Income Tax Officer, Ward-14(3), Hyderabad
3. CIT(A), Vijayawada
4. CIT(TDS), Hyderabad
5. D.R. ITAT “B” Bench, Hyderabad.